Growth in manufacturing activity remains tentative

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Expansion dipped in October after gradual improvements in activity during the second half of 2009, according to the BNZ Capital - Business NZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for October stood at 50.6. This was down 0.9 points from September, but still the first consecutive expansionary result since January-February 2008. The October 2009 result was also 7.5 points higher than October 2008.

A PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining. PMI values for October in the years 2002-2008 ranged from 43.1-60.9, with an average score for the previous October results of 53.4.

Business NZ chief executive Phil O’Reilly said that while the September result represented a long time between drinks for the sector, the October result showed that we shouldn’t be popping the champagne just yet in terms of a sustained recovery in the sector.

“Despite the tentative aspect of the October result, one pleasing feature was the relatively significant fall in the proportion of negative comments from respondents. Discussions around the general effects of the recession linger; but those recording positive aspects note the build up in orders and activity as part of the pre-Christmas rush, while others have secured contracts previously put on hold by the customer. Exchange rates remained a concern for some, although the proportion of comments on this issue remains similar to the previous month.

BNZ Capital senior economist Craig Ebert said October’s stumble was a reminder not to ask too much of the recovery at this early stage.

“The slippage in the PMI’s employment component back into negative territory seemed an especially important hint that firms may not be entirely convinced of the definite pick up they propound.

“Employment offers one of the most reliable signs that prospects are improving well enough, surely enough, to have firms making important decisions about taking on staff, not just offering free-to-air musings about their future.

“Even if manufacturing was looking that assured to have re-hiring back on the agenda, we would have to wonder why pay rates are under as much downward pressure as recently indicated in the survey conducted by the Employers and Manufacturers Association (Northern).”

Two of the five seasonally adjusted main diffusion indices displayed expansion. Production (51.2) experienced a slight drop from the previous month but still recorded expansion, while new orders (53.4) decreased 2.3 points from September. After a positive result in September, employment (46.5) returned to negative territory with a result similar to August 2009. Deliveries of raw materials (49.0) slipped into decline after four consecutive months of improvement, while finished stocks (47.4) was the only sub-index that improved from its September 2009 result.

Unadjusted activity for October showed consecutive expansion for all regions. Otago/Southland (59.0) again led the way with a result similar to the previous month. The central region (56.3) recorded its highest value since November 2007, while the Northern region (53.2) rose 0.5 points from September. The Canterbury/Westland (54.7) region improved during October, after a dip in expansion during the previous month.

For media comment: Craig Ebert 04 474 6799

PMl results are available on www.businessnz.org.nz under ‘PMI Reports’. For more information or assistance with data interpretation, contact Stephen Summers, ph 04 4966564, ssummers@businessnz.org.nz. The BNZ Capital - Business NZ PMI (performance of manufacturing index) draws on the depth of member companies associated with Business NZ: Employers and Manufacturers Association (Northern), Employers and Manufacturers Association (Central), Canterbury Employers’ Chamber of Commerce and Otago Southland Employers Association. The survey is sponsored by Bank of New Zealand Ltd.