The Economy: Manufacturing Weak, Economy, Wages OK

The National Australia Bank says the outlook for Australia's manufacturing industry is bleak with output falling by almost 1% in the September quarter.

In the first of a new quarterly survey of manufacturing, the bank says manufacturing activity was very weak in the quarter with all manufacturing sub-sectors declining.

But it is not all gloom from the economy with wages growth slowing a touch in the September quarter and Westpac reporting that its leading index is still pointing towards solid growth in 2012.

The data won't have an impact on interest rate thinking at the Reserve Bank which remains concerned about what is happening in Europe where rising interest rates are again threatening to set off a new crisis around Italy, or Spain, which goes to the polls on Sunday.

The NAB's survey said manufacturing activity fell by around 1% in the quarter, with sub-sectors experiencing the biggest drops including non-metallic minerals (cement, ceramics and glass), wood and paper and printing.

The bank said the quarterly fall "signals a likely fall in quarterly manufacturing output, with our index at -0.9 points broadly consistent with falls in manufacturing GVA (gross value added), at around -1.2 per cent for the third quarter."

"Business Confidence in the Manufacturing sector declined sharply in Q3, and this was the largest contributor to the downturn in the Activity Index.

"Ongoing uncertainty in the global economy, the weak state of domestic demand and continued competitive pressures due to the high currency has led to subdued sentiment in the manufacturing sector.

"Purchase Costs in the manufacturing sector have trended steadily higher since early 2010 - contributing significantly to the decline in the Activity Index in Q3.

"By industry, Chemicals and Metal products have seen considerable increases in purchase costs since the start of the year.

"In contrast, growth in purchase costs softened for Non-metallic minerals.

"At a high level, the disparity between individual sub-sectors narrowed a little in the September quarter - as the Activity Indices for all sectors (excluding Textiles, Clothing & Footwear) deteriorated.

"The largest declines in Q3 were recorded in the Printing and Non-metallic minerals sectors," the bank said.

Metal products fell by 1.2% as steelmakers BlueScope and OneSteel together sacked more than 2,000 workers in the three months to September.

The NAB's inaugural Manufacturing Activity Index will give us an expanded view of its monthly business confidence and conditions survey for a sector of the economy that has been contracting as a share of GDP for some years. Currently it accounts for around 9% of the economy.

Meanwhile Westpac and the Melbourne Institute said that the annualised growth rate of their Leading Index, (which indicates the likely pace of economic activity three to nine months into the future), "was 3.3% in September 2011, basically in line with its long term trend of 3.2%. The annualised growth rate of the Coincident Index which gives a pulse of current activity was 0.9%, well below its long term trend of 2.7%."

"Over the last six months the growth rate in the Index has increased slightly from 2.8% to 3.3%. The two key components in the Index which are extracted from the national accounts contributed 2.2 percentage points to the pick-up in growth - corporate profits (1.4ppts) and productivity (0.8 ppts), Westpac said in a statement.

"That improvement was complemented by overtime worked (0.2ppts). On the other hand some series have dragged growth lower - manufacturing prices (-0.6ppts); the all ordinaries index (-1.1ppts) and dwelling approvals (-0.3 ppt's). Other components: US industrial production and real money supply were neutral."

Finally, the September quarter's Labour Price Index from the Australian Bureau of Statistics shows that wage costs are not a problem, despite all those scare stories in the media about exploding wages in the resources sector, and especially in Western Australia and Queensland.

The ABS figures show that total hourly rates of pay, excluding bonuses, rose by a seasonally adjusted 0.7% in the September quarter.

The market forecast was for a rise of 0.9%.

The index measures movement in underlying wages by calculating the change in the wage and salary cost of a basket of jobs.

The ABS said the national minimum wage increase of 3.4% with effect from 1 July 2011 was granted by Fair Work Australia in June 2011.

"This increase in minimum wage rates impacted the wage price index (WPI) in the September quarter 2011," the ABS pointed out.

That in turn didn't have a huge impact on the overall index.

The ABS said Queensland recorded the largest quarterly All sectors rise (1.5%) while Victoria recorded the smallest (1.0%).

"Only Western Australia and Tasmania recorded a larger quarterly rise in the September quarter 2011 than in the September quarter 2010 while South Australia remained constant. Rises through the year ranged from 2.9% for the Australian Capital Territory to 4.0% for Western Australia.

"In the Private sector, Tasmania recorded the largest quarterly rise of 1.8% while Victoria recorded the smallest (1.1%). Rises through the year in the Private sector ranged from 3.4% for South Australia to 4.3% for the Northern Territory.

"In the Public sector, in the September quarter 2011, quarterly rises were smaller than in the September quarter 2010 in all states and territories, with the exception of South Australia, Western Australia and Tasmania. This was mainly due to delays in the commencement of new enterprise agreements in many jurisdictions.

"The largest quarterly rise of all states and territories in the Public sector was recorded by Queensland (1.6%) while Victoria recorded the smallest (0.6%). Tasmania (4.4%) recorded the largest rise through the year to the September quarter 2011 and the Australian Capital Territory recorded the smallest (2.5%)."

Turning to industries, the ABS said that the largest quarterly rise for All sectors (in original terms) of 2.2% was recorded by Accommodation and food services and Other services.

"For both these industries the September quarter 2011 quarterly rise was the largest since the commencement of the series.

"The smallest rise for the September quarter 2011 was recorded by Mining (0.5%).

"The All sectors through the year rises ranged from 2.8% for Public administration and safety to 4.5% for Other services.

"Other services recorded the largest quarterly rise in the Private sector of 2.3%. The smallest rise was recorded by Mining with 0.5%.

"In the Public sector, Professional, scientific and technical services (2.3%) had the largest quarterly rise and Health care and social assistance had the smallest (0.6%)."

The ABS said that some public service pay deals that are normally finished in the September, had yet to be settled, and estimates had been made in the figures to account for these and would changed with actual settlements.

Average weekly earnings for the three months to August will be released later today by the ABS.