PMI index takes a dive

The manufacturing sector has sent a southerly cold snap through the sunny run of recent economic data.

The BNZ-Business New Zealand performance of manufacturing index (PMI) dropped sharply last month to its lowest level for two years.

At 50.9 the PMI is still on the right side of the level (50) which separates expansion in activity from contraction, but it's down 6.2 points on December.

For the first time since August 2012 more manufacturers reported a decline than an increase in production. And it was accompanied by a flat reading for new orders, after several months of healthy gains, and a jump in inventories.

That suggested manufacturers were surprised by a drop in demand, said Bank of New Zealand economist Doug Steel. "If so it doesn't bode well for production ahead, short of a bounce-back in demand. We'll see."

The PMI survey results were at odds with the run of other indicators including business and consumer confidence and last week's labour market data. Unlike sentiment surveys, which ask firms about their intentions and expectations, the PMI reflects what they have done or experienced.

The PMI is adjusted for seasonal patterns. Even so economic indicators over the holiday period had to be treated with caution, Steel said. "So we wouldn't leap to big conclusions on one January result. But by the same token, the extent and detail of the latest PMI move suggests we shouldn't fully discount it either.

"It certainly questions the strength of growth early in 2015."

Steel said one reason not to be too downbeat was that manufacturers' positive comments far outnumbered negative ones.

A key support for manufacturing has been the strength of construction activity. Reserve Bank analysis indicates a 1 per cent rise in construction is associated with a 0.4 per cent rise in manufacturing activity, reflecting how much of the sector provides inputs to the building industry.

"The value of residential and non-residential building consents in 2014 was a cool $2.5 billion, or 21 per cent higher than a year earlier," Steel said.

"Lead indicators remain positive, suggesting construction will be a solid brace under domestic demand ahead."

Other influences had mixed effects.

Lower oil prices reduced costs for many firms and would generally lift domestic demand over time, he said, but were also reflected in the weakest PMI readings for the petroleum, coal and chemicals industry since 2009.

And on the foreign exchange front, in general manufacturers viewed the New Zealand dollar's strength against the Australian dollar, euro and yen negatively from an exporting and import-competing point of view, but also saw the recent decline against the US dollar as positive.