Silver lining in manufacturing lift

Manufacturing activity snapped three months of contraction in October, with a broad-based pickup in demand strong enough to see firms burn through some of their inventories.

The Bank of New ZealandBusinessNZ performance of manufacturing index rose 3.8 points to 52.6 in October, and was a little below the 53 reading a year earlier. That gain brought the index back above the 50 level separating expansion from contraction after three months of dwindling activity.

The index showed a 5.3 point jump in new orders to 56.2, the highest level since May 2018, while the production measure climbed 6 points to 52.6, its highest level since February. What’s more, finished stocks shrank, falling 0.5 of a point to 48.5.

Manufacturing had been in a rut in recent months and economists predict it had a negative impact on September-quarter gross domestic product, which won’t be published until next month.

BNZ economist Doug Steel said the October reading was just one month rather than a trend. But he said the strength of new orders bodes well for the future, especially when combined with the reduction in inventories.

“That’s one of the [strongest] reasons to think . . . this might have some legs. It does feel like a pick-up in demand, given that unwind in inventory and coupled with the increase in new orders,” Steel said.

The increase was broad-based and couldn’t be tied to one sector, which Steel said also supported the idea that it was a genuine pick-up.

“Construction activity is important for many manufacturers. So another push to higher highs for residential building consents bodes well for demand in the near future,” Steel said.

The deliveries measure rose to 51.9 from 46.8 in September. This week, transport and logistics group Mainfreight said the slowing New Zealand economy had led to a slower pace of growth, although it expected that to turn around with strong pre-Christmas freight volumes in the pipeline.

The PMI’s employment subindex edged up 0.1 of a point to 50.2.