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The BNZ-BusinessNZ manufacturing index rose from 41.9 in June to 52 in July. Last year’s monthly average was 57.1.
Points below 50 reflect contraction, and above, expansion.
Nationally, the seasonally adjusted index for July fell 1.5 points to 51.2.
The soft manufacturing index data follows numerous business surveys over the past several weeks showing a decline in confidence and outlook in general.
Otago-Southland and the mid-North Island are both barely in expansion mode, while the northern North Island and Canterbury-Westland are in contraction.
Otago Southland Employers’ Association chief executive Virginia Nicholls said she was pleased to see the southern index rebound after the sudden drop the previous month.
"The regional breakdown in categories show employment is in expansion at 60, while new orders, production levels, stocks of finished products and deliveries of raw materials are all the same," she said.
The South was continuing to report shortages of experienced and skilled staff.
"The construction industry is continuing to report positive trading, and some are reporting a more competitive market," Mrs Nicholls said.
She said food and beverage manufacturers were busy, both with export and also building up stock for different events and holiday periods.
BusinessNZ executive director for manufacturing Catherine Beard said the July result produced "a few red flags" in terms of the manufacturing sector’s current position. Production, at 49 points, experienced its lowest level of contraction since May 2015, while the unadjusted index data was in slight contraction, for the first time since January 2017, she said. While employment, at 51.2 points, rose above the no-change mark after two months of decline, new orders at 52.6 displayed only minor to moderate expansion, Ms Beard said.
BNZ senior economist Doug Steel said with the national index at 51.2, it was hinting at more than just a slowdown in the manufacturing sector, but outright slow growth.
"Being a survey of actual activity, not confidence or expectations, the manufacturing index results through June and July are not a good look for overall economic growth," he said.
Most disturbing was the production index dropping into contraction in July, to 49, but despite that, inventory rose.
"This combination suggests demand softened, something that needs to be watched closely," he said.