Manufacturing falls for 25th consecutive month

Australian manufacturing continues to suffer, despite lower interest rates and the falling Aussie dollar.

According to the Australian Industry Group (AIG), Performance of Manufacturing Index (PMI) dropped 7.6 points to 42 in July, compared to the previous month. 50 points marks the separation between expansion and contraction.

So far the falling Aussie dollar, which dropped below 90 US cents for the first time in three years earlier today, is having little positive effect on manufacturers thus far. Interest rates are at all-time lows, and could go even lower next week, with RBA governor Glenn Stevens indicating that the central bank had plenty of room to cut rates if it became necessary.

The report also noted that one third of respondents noted extreme weakness in local demand and consumer confidence. That could put some pressure on the likes of electronics and white goods retailers JB Hi-Fi Limited (ASX:JBH) and Harvey Norman Holdings (ASX:HVN).

Another 15% of respondents pointed to the political uncertainty as a reason for poor local demand. A similar number noted a reduction in demand from their mining and construction sector customers, with some mentioning the closure of manufacturing customers and/or suppliers.

The metal products sub-sector is showing a particularly sharp rate of contraction, and the index has fallen to a record low of 28.6 points. That’s bad news for steel producers Arrium (ASX:ARI) ex-OneSteel and BlueScope Steel (ASX:BSL). Wood and paper products also saw a worsening pace of contraction, falling to 35.7 points in July.

Food, beverage and tobacco products was the only sector that expanded in July 2013, with a reading of 54.3 points, suggesting consumers are still spending on essentials. This sub-category tends to hold up during tough economic times.

Foolish takeaway

While the lower dollar will help our exporters, it’s a double-edged knife, hitting consumers in the hip pocket with higher petrol prices, while imported goods in stores cost more. The falling dollar is also being blamed by manufacturers for raising input costs. Over the longer-term though, the lower dollar should be good for our manufacturing sector – it may just take some time to work its way through.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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