Manufacturing loses traction

New orders plunged to a 14-month low in July. Photo / Martin Sykes

Manufacturing, one of the drivers of the recovery, appears to be losing traction, with the BNZ-Business New Zealand performance of manufacturing index dropping back into contraction for the first time in nearly a year.

The PMI dropped 6 points to 49.9. Any reading above 50 indicates activity is expanding; below 50 shows contraction.

Of the five sub-indices which make up the PMI, the drop was most pronounced in new orders, which plunged 10 points to a 14-month low, and deliveries, the weakest for 11 months.

"The slump in July's PMI is a bolt from the blue and a disappointment," said BNZ senior economist Craig Ebert.

"We were looking for this sector to keep lending a firm hand to the recovery. The drop in could not have been driven by a worse component - new orders."

Manufacturing was a strong contributor to GDP growth in the December and March 2010 quarters, following seven straight quarters of contraction.

Over the year to March, output was up 4.3 per cent, more than twice the growth in the economy as a whole.

Catherine Beard, Business NZ's executive director for manufacturing, said: "The turnaround from expansion to contraction reflects a bumpy road back to recovery, with manufacturers indicating they can have a good few months and then orders suddenly slow down.

"The figures for production, employment, and finished stocks are probably lagging the reported reduction in new orders, which is what drives the other indices into positive or negative."

The equivalent indices in trading partners' economies have been easing over the past three months, though they remain in expansion territory.

The global PMI, which JP Morgan compiles, while at an eight-month low, is still at historically respectable levels - and far from the crevasse it fell into in 2008.

Ebert was wary of reading too much into the latest New Zealand survey, given the abruptness of the drop and the wide variations among industries it records.

"Only a month ago, respondents to the PMI survey were relatively upbeat, with the overall index and the great majority of its sub-components firmly in expansion mode. Now, all of a sudden we are being told it things are back to being very erratic," he said.

"We can't discount the possibility that the PMI drop is more noise than signal - just like the recent quarterly labour market results have been.

"But it is hard to imagine it is all noise."

Many of the comments manufacturers attached to their responses singled out the building industry as prime a source of concern.

"This makes a lot of sense, with a good deal of local manufacturing no doubt dependent on the local construction cycle, not just investment in plant, machinery and equipment and the more high-profile export markets, predominantly Australia."