Australian PMI®: Manufacturing contraction eases in May

The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) recovered by 5.8 points to 41.6 in May, after experiencing the largest single-month drop in the index's history in April (readings below 50 points indicate contraction in activity, with lower results indicating a faster rate of contraction).

The manufacturing industry remained in deep contraction in May, as COVID-19 restrictions affected demand across the board. The decline slowed across all activity indices in May, except for the exports index which recorded its lowest ever monthly result as many overseas markets essentially shut down.

Many manufacturers reported that orders from their regular customers have been delayed or cancelled altogether because of the pandemic.

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Ai Group Chief Executive Innes Willox said: "While less of a fall than we saw in April, the further deterioration of manufacturing performance in May is deeply concerning. From an already low base, manufacturing production and employment fell, and new orders dropped further. Other than the large food & beverages group which experienced a small gain, and the chemicals group which was broadly steady, all sectors of the manufacturing industry went further backwards in May. Manufactured exports suffered a particularly severe hit with the steepest fall in this index since 2004 when it was first compiled. The industry is hoping the fiscal and monetary support that has been provided to the economy, together with the gradual lifting of restrictions that are inhibiting production and consumption alike, limit the extent of further deterioration and hasten the beginnings of a recovery. In the meantime, we are steadying ourselves for further losses as indicated by the low level of new orders received by manufacturing businesses. Action to accelerate the easing of restrictions is particularly important given the success in constraining the spread of COVID-19. The removal of interstate barriers to the movement of goods and people is clearly overdue," Mr Willox said.

Australian PMI®: Key Findings for May

• Five of the seven activity indices in the Australian PMI® indicated a further contraction in May compared to April, albeit at an easing pace (see table below). Only the supplier deliveries index was broadly stable (up 11.5 points to 50.3), while manufacturing exports fell to the lowest level on record (down 11.5 points to 31.1) – lead times and higher prices for air freight impacted both importers and exporters, and many overseas markets essentially shut down.
• Four of the six manufacturing sectors in the Australian PMI® contracted and two were broadly stable in May. The food & beverages (down 1.5 points to 51.0) and chemicals (up 0.1 point to 49.7) sectors remained broadly stable, but the large food & beverages sector recorded its lowest result since 2014 as shopper stockpiling subsided. Despite deep contractions across all of the more traditional, heavy manufacturing sectors in May (see table below), those selling equipment to the agricultural sector reported 'green shoots' because of recent rain in some drought-affected regions.
• The input prices index eased by 6.2 points to 65.4 in May, indicating slower price increases for manufacturing inputs. The selling prices index dropped 8.3 points to 42.4, indicating that manufacturers' selling prices declined on average in May after rising in each of the previous three months.
• The average wages index decreased by a further 3.9 points to 45.6 points, indicating few (if any) manufacturers were able to increase employees' average wages in May. This was the lowest monthly result in the history of this series (since September 2007) and only the third time it has fallen below 50 points. This fall might not reflect compensating wage payments for employees with access to the JobKeeper income support scheme.

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Results above 50 points indicate expansion. * All indexes for sectors in the Australian PMI® are reported in trend terms (Henderson 13-month filter).

Background: The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) is a national composite index calculated from a weighted mix of the diffusion indices for production, new orders, deliveries, inventories and employment. An Australian PMI® reading above 50 points indicates that manufacturing activity is expanding; below 50, that it is declining. The distance from 50 indicates the strength of expansion or decline. Australian PMI® results are based on responses from a national sample of manufacturers that includes all states and all sub-sectors. The Australian PMI® uses the ANZSIC industry classifications for manufacturing sub-sectors and sub-sector weights derived from ABS industry output data. Seasonally adjusted and trend data are calculated according to ABS methodology. The Australian PMI® commenced in 1992. More information about the history and methodology of the Australian PMI® is available online.

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