PMI index hits reverse

A barometer of manufacturing activity has swung back into contraction territory.

The BNZ-Business New Zealand performance of manufacturing index (PMI) fell 5.8 points last month to 48, its lowest level since November last year.

Any reading below 50 indicates the sector is going backwards.

The fall was led by the key sub-indices of production and new orders, Business NZ's executive director for manufacturing, Catherine Beard, said.

The drop in activity was reflected in a higher proportion of negative comments from respondents, 58 per cent from 52 per cent in March, with the high dollar and low demand the most prevalent, she said.

BNZ economist Doug Steel said the downshift was relatively pervasive across industries, regions and firm size, so it would be unwise to dismiss the result as simply statistical noise.

While it was impossible to know for sure what caused the dip in production and new orders, there were plenty of potential candidates: the strong currency including a seven-month high against the Australian dollar, ongoing uncertainty and confusion around the European debt situation and the outlook for world growth, higher wholesale spot electricity prices reflecting low levels in the hydro lakes, and reduced livestock processing as feed conditions allowed farmers to hold on to stock for longer than usual.

But since the time of the April survey the New Zealand dollar had fallen more than 3 per cent on a trade-weighted basis, Steel said.

The PMI has been unusually volatile in recent months, by the standards of its 10-year history.

From a low of 45.8 last November, a level not seen since the recession, it climbed to 57.8 in February, a level seen only once and briefly since the pre-crisis boom, before plunging back into negative territory last month.

However, the PMI's employment sub-index at 51.2 supported the view that the manufacturing sector remained on a mildly positive trend, Steel said.

Last week's household labour force survey showed manufacturing employment grew by 5000, or 2 per cent, in the year to March.