A further fall in manufacturing activity during June confirms the slide in business confidence isn’t just due to anti-government sentiment.

Skilled labour shortages are continuing to restrict capacity, as industry is facing increased demand. 

The BNZ-BusinessNZ performance of manufacturing index (PMI) fell to a seasonally adjusted 52.8 in June from 54.4 in May.

This is the second successive monthly drop, taking the PMI to its lowest level since December 2017's reading of 51. 

The employment component of index eased for a second straight month, dropping from 49.0 to 49.6. A reading above 50 indicates manufacturing is expanding while below 50 it is declining.

BNZ senior economist Craig Ebert describes this as a “red flag” if it continues.

"A flat to negative result on this component is not necessarily alarming,” he says. “But two in a row can start to ask some questions."

Four of five components decline

Three of the four other components in the index also fell. Production was down to 51.8 from 53.4 in May, its lowest point since January.

Finished stocks fell to 50.2 from 51.6 and deliveries dropped to 51.3 from 58.4.

The only positive measure was a rise in new orders from 56.7 to 57.1.

Mr Ebert says manufacturers report near extreme levels of difficulty in finding staff, whether skilled or unskilled. 

"These resourcing issues need to be borne in mind when assessing the weak-looking jobs index in the PMI," he says. "A lack of hiring can reflect a paucity of decent candidates, as much as a lack of demand for staff."

He adds the deceleration in the PMI over the past couple of months may not continue as the positive growth in new orders is encouraging.

In her analysis, BusinessNZ executive director Catherine Beard says the proportion of positive comments in the June (51.7%) decreased from May (55.1%) and is similar to February’s figure (51.4%).

"Those who provided negative comments typically noted a general downturn and uncertainty in the market," she says.

During 2017, the PMI was in expansion mode. It averaged 56.2, compared with this year’s trend of 53.8 (excluding April’s spike of 59.1).

The 53.8 figure is also the long-term trend going back to August 2002.

The complementary BNZ-BusinessNZ Performance of Services Index (PSI) will be issued on Monday.

(Source: NBR, Nevil Gibson)