Manufacturing PMI drops to three-month low in June – Judo Bank

82
Image credit: Jeson/stock.adobe.com

The headline seasonally adjusted Judo Bank Australia Manufacturing Purchasing Manager’s Index (PMI) posted 47.2 in June, down from 49.7 in May.

This indicated a fifth successive monthly deterioration in manufacturing sector conditions and at the fastest pace since May 2020.

Matthew De Pasquale, economist at Judo Bank, said: “Following two months of improvement, the manufacturing sector’s key activity indicators have softened to the cyclical lows seen earlier in the year.”

He continued, “Manufacturers are marginally scaling back production through reduced headcounts and inventories in response to prolonged difficult trading conditions in the sector.”

Manufacturing production contracted in June amid fewer new orders placed with Australian goods producers. According to panellists, elevated interest rates and soft market conditions underpinned the latest fall in sales and demand.

The pace at which new orders and production declined was the fastest in three months and especially steep in the case of orders.

The fall in total sales appeared to be centred on the domestic market as export orders were broadly unchanged in June.

“Despite a four-month upward trend that brought the manufacturing output index slightly under the neutral level, the index dipped in June to the lowest in three months and was slightly lower than the early flash reading. The manufacturing new orders index has also returned to cyclical lows through June,” De Pasquale noted.

As a result of the reduction in new work, capacity pressures further eased for Australian manufacturers, signalled by another steep reduction in backlogs of work.

Job shedding also returned to the Australian manufacturing sector, after employment levels rose only slightly in May. The pace at which employment levels fell in June was solid and the fastest since March.

Meanwhile, purchasing levels also fell in line with lower orders and production, with buying activity declining at an even faster pace.

Australian goods producers indicated reluctance in holding additional inventory during a period of falling demand. Both stocks of purchases and finished goods shrank in the latest survey period.

“Manufacturing activity readings have fluctuated between 45 and 50 since October 2023, indicating a sustained but not worsening contraction amidst ongoing cost-of-living pressures.”

“With business activity slowing over the month, the employment index dipped back below the neutral level. Manufacturers, on average, have been gradually reducing headcounts throughout 2024,” De Pasquale commented.

Turning to prices, average input costs continued to increase in June, attributed to higher raw material, currency conversion, and transport-related costs.

Supply-side shortages also played a role in raising prices, with lead times lengthening at a sharp pace, as vendors faced constraints with shipping delays and supply shortages.

According to the report, the overall rate of input price inflation eased from May, falling further below the series average. In turn, goods producers raised selling prices at a less pronounced rate, the slowest in three months.

“After stabilising at pre-pandemic levels in 2023, margin pressures in the manufacturing sector appear to be picking up. The input price index climbed significantly to 58.4 in June, which, while slightly down on the prior month, is above the average reading of 56.0 seen over the first four months of the year. The rise in input price pressures doesn’t appear to have been passed onto consumers, with the output price index remaining subdued at cyclical lows in June,” De Pasquale explained.

Sentiment in the Australian manufacturing sector remained positive in June, as signalled by an above 50.0 print of the Future Output Index.

However, the level of confidence eased to a seven-month low as concerns gathered over rising costs and competition dampening sales.

“The May Manufacturing PMI results water down the likelihood of the predicted manufacturing rebound suggested in the May PMI. Despite the soft June results, some relief is still anticipated for consumer goods manufacturers through 2024-25 as households benefit from tax cuts and government cost-of-living measures from July 1,” De Pasquale concluded.