There was no spring in the manufacturing sector's step in September, with activity contracting slightly for the second consecutive month, according to the BNZ-Business NZ Performance of Manufacturing Index (PMI).
September's seasonally adjusted PMI reading of 49.2 followed August's 49.3. A reading below 50 represents contraction of activity in the sector, while a reading above 50 indicates expansion. The sector had been in expansion mode between September 2009 and July 2010.
Despite this, a rise in the employment component of the PMI could give the Reserve Bank reason to not run monetary policy on the "slack side" for too long, if a strengthening labour market were to re-stoke inflation expectations, BNZ economist Craig Ebert said.
Meanwhile, the production reading in the headline PMI was a seasonally adjusted 47.8 in September, down from 51.1 the previous month.
Unadjusted figures show activity expanded in September, with a reading of 51.5 up from August's 50.7, but down from 53.2 in September 2009.
Ebert said while the September PMI looked like a disappointment, details of the survey suggested a sense of stability.
"Granted, conditions underfoot appeared damp, again. However, the survey’s forward-looking indicators were looking better," Ebert said.
"There was certainly a relief-ridden clawback in the new-orders component of September’s PMI, overall.
"It increased to a seasonally adjusted 50.3, from the 47.7 it had subsided to in August. The trend was not looking good there for a while. For now it’s looking not quite so threatening.
"The more obviously encouraging look-ahead type indicator was around staffing. The PMI gauge on this edged a fraction further into expansion territory during September, with 51.7, from 51.3.
"Sure, it’s not gangbusters, by any stretch. But none of it would be likely if manufacturing firms saw the immediate weakness in reported output (47.8) as the shape of things to come."
Ebert said the PMI's positiveness on jobs fit with a wider range of other upbeat labour market indicators, which could give reason for the Reserve Bank to be "a little careful about running policy on the slack side for too long":
The early-September Manpower survey, for instance, retained a net-positive 15% reading regarding hiring intentions over the coming few months.
And while the October-December Hudson report was “down” from a quarter ago, it was only so by a margin-of-error half a per cent, to remain on the right side of the ledger with 19.8%.
Then yesterday the Hays group reported a ramp up in hiring activity by businesses. Even to the extent of suggesting skill shortages were starting to show up again in some areas.
All of this accords with our view that the labour market statistics may well be a positive surprise over the coming months, and with staffing constraints emerging sooner than many expect – even devoid of strong GDP growth and any material soaking up of spare capacity in respect of plant and premises.
This, in turn, has the potential to re-stoke inflation in wages and salaries, even ahead of the pick-up we foresee in underlying price inflation, with the policy-impacted inflammation of the headline CPI simply adding to the upside potential for already-lofty inflation expectations in general.
For these reasons we believe the Reserve Bank needs to be a little careful about running policy on the slack side for too long. These and the likelihood the real-economy performs much better than the immediately damp indicators would suggest, as even today’s PMI gave rise to believe.
(Update includes BNZ comments.)
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