Manufacturing sector gathers momentum

We were pleased to see the Performance of Manufacturing Index (PMI) has strengthened further in February 2013.

This was not only because we have been going out of our way to highlight the sector’s positives (when others have been declaring an industry-wide crisis) but also because the latest PMI (up at 56.3) suggests that the manufacturing industry is now expanding at a decent clip, albeit in a still-piebald fashion, and with jobs lagging for the meantime.

The headline numbers were certainly very encouraging. The summary PMI result of a seasonally adjusted 56.2, following 55.2 in January – puts it comfortably above the 52.3 average since inception (August 2002).

One swallow does not make a summer; but two swallows increase the chances.

Momentum appeared even stronger when it came to the production component of the PMI. It leapt to 61.4 (for the record, the fastest in more than eight years).

The new orders component enlarged to 58.2, from 56.3.

This is obviously a good pointer to on-going production gains.

This strength is welcome, after the less-than-overwhelming data we saw in the December quarter manufacturing survey.

While its sales volumes were up a good-looking 1.5%, inventories were soft.

The implications for non-food manufacturing production were slightly negative.

Even adding in our estimates of booming food processing in the (pre-drought) December quarter left us judging a 0.3% increase for manufacturing output in Q4 overall.

A better result in Q1 manufacturing growth is reflected in the latest PMI.

The caveats

However, its strength is not without a number of caveats.

One is that the PMI momentum is not evenly spread around. Indeed, the gap between the best and worst performing industries remains relatively high.

The best (based on a three-month rolling average) was food beverage and tobacco manufacturing, with 66.0. This might, to some extent at least, reflect greater than normal meat processing, on account of the drought, although the dry weather will, by the same token, be crimping the manufacture of dairy products.

The other strong industry performers according to the latest PMI are non-metallic mineral products (61.6) and “other” manufacturing (61.6).

But spare a thought for printing publishing and recorded media (42.9), textile clothing and footwear (43.4) and metal product manufacturing (44.0).

Large firms gain

It was also the case in February that only the very largest of firms were going for broke. Businesses employing more than 100 staff registered a PMI of a whopping 76.3. Micro firms (1 to 10) were at 53.7, small-to-medium (11- 50) at 51.0 while medium-to-large sized firms (51-100) were at 50.0.

The other caveat to the latest PMI is that its reported production increases, overall, are not translating into more jobs (yet). February’s employment index, while improved at 50.1, only really stabilized, having been below the breakeven mark of 50.0 for the prior 8 months.

Nonetheless, we have to take the latest PMI as encouraging.

It outlines that production is picking up, and will keep doing so if new orders are any guide. This, in due course, can be expected to drive a recovery in employment.

The way some people are talking, we should be witnessing a very weak, to plunging, PMI. In fact, it is improved to a more positive level.

The BNZ Manufacturing Commentary was prepared by the Bank’s Head of Research Stephen Toplis, Senior Economist Craig Ebert, Economist Dough Steel and Strategists Mike Jones and Kymberly Martin. BNZ is the Title Sponsor of the Indian Newslink Indian Business Awards 2013 and Sponsor of the ‘Best Large Business’ and ‘Supreme Business of the Year.’

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