Manufacturing Sector Experiencing Mild Slowdown

New orders, production, purchasing activity and inventory levels all decline in September, but all signs point to a soft landing with little evidence of a deeper downturn ahead

Australia’s manufacturing sector remained in contraction during September but is experiencing a mild slowdown with few signs of a deeper downturn ahead, according to the latest Manufacturing Purchasing Manager’s Index (PMI) data from Judo Bank.

Central to the latest deterioration in conditions was a sharper fall in new orders, which shrank for a 10^th straight month to the equal-lowest reading since the initial pandemic lockdowns of 2020.

In turn, manufacturers worked through their existing orders. Consequently, production levels fell at an accelerated rate in September and for the 10th consecutive month.

While employment levels rose in response to labour constraints, purchasing activity and inventory levels fell in tandem with lower new work intakes.

The PMI found purchasing activity fell on the back of lower new business and production, leading to reduced pre-production inventory holdings in September.

Anecdotal evidence suggested firms were cautious about holding additional input stocks while new orders declined. Stocks of finished goods likewise declined modestly.

Average input prices, meanwhile, continued to climb at the end of the third quarter, with higher raw material, labour and financing costs being listed by panellists as contributors.

The rate of inflation eased, however, amid reports of softening demand. That said, manufacturers opted to share their increased cost burdens with clients at a faster rate in the latest survey period.

“Input price inflation was down in September but remain elevated compared to pre-pandemic norms. Indeed, input prices, a reflection of manufacturers’ cost pressures, are showing signs of gradually rising again since the middle of the year, snapping the disinflation trend of 2022-23,” Warren Hogan, Chief Economic Advisor at Judo Bank, says

“Final prices remained steady in September at somewhat elevated levels but are well off the highs of 2022.”

Hogan says the underlying trend – which saw the PMI dip slightly to 48.7 in September – is consistent with a gradual slowdown in activity across the manufacturing sector, both domestically and globally.

The latest reading signalled a seventh monthly decline in manufacturing operating conditions. Although the pace of deterioration accelerated since August, it remained modest overall.

“The recent PMI results suggest that a soft landing is progressing for the Australian manufacturing sector, with few signs of a deeper downturn ahead,” he says.

“Although the seasonally adjusted New Orders index remains well below 50 in contractionary territory, the Australian manufacturing sector is experiencing a normal cyclical slowdown with few signs of a more severe downturn typical of a recession in the broader economy.”

Policymakers, particularly the RBA board, will most likely welcome these developments, Hogan says.

“The priority for the economy in 2023 is to get inflation back down to the RBA’s 2 per cent to 3 per cent target, which will require a slowdown in economic activity. This is precisely what we are seeing in the manufacturing sector in 2023,” he says.

“The manufacturing sector is no longer a source of significant inflationary pressure within the Australian economy, although we are far from seeing deflation in manufactured goods.”

Supply chains have normalised in 2023 and continue to be operating in an orderly fashion, in sharp contrast to the pandemic years, he says.

“If anything, the slowdown in manufacturing activity over the past year has seen capacity restored.

“Suppliers’ delivery times are at what should be considered a normal level while the backlog of work is near the long-run average, in contrast to the massive build-up through the pandemic years,” Hogan says.