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The Bank of New Zealand-BusinessNZ performance of manufacturing index lifted 0.3 of a point to 48.4 from July but remained below the 50 level that separates expansion from contraction.
The last time the sector experienced a decline for two months in a row was in 2012. Manufacturing activity has been slowing all year as the domestic economy cools and uncertainty shrouds global trade.
"The PMI is a survey of outcomes, not sentiment. So the weakness is not a reflection of fear or uncertainty about what might lie ahead. It provides a guide to what is happening. There is no doubt the manufacturing sector is under duress," BNZ senior economist Doug Steel said.
"Disconcertingly, the PMI adds to a building case over recent times that there has been a palpable softening in demand - at least for manufactured goods," he said.
Overall activity in Otago and Southland's manufacturing sector dropped to 45 points, the third month the sector has contracted.
New orders, deliveries of raw materials and production levels were in contraction, while employment levels and stocks of finished products were the same.
Otago Southland Employers' Association chief executive Virginia Nicholls said it was concerning that new orders had weakened.
There was mixed reaction from the construction sector, with some companies busy but others who were working outside Otago and Southland finding fewer opportunities, Mrs Nicholls said.
There were significant concerns with the escalation of the trade war between China and the United States, while the increase in the minimum wage was causing concern for manufacturers.
Some manufacturers were now looking to technology investments to reduce staff costs, she said.
The latest national PMI reading showed that the new orders sub-index fell to 45.6 in August from 48.5 in July and 52.2 in June. It was the lowest since May 2009 and the sub-index is now almost 10 index points below its long-term average of 55.1.
The production sub-index fell from 51.2 in July to 49.7 in August and "further declines in new orders will typically lead to worsening of production levels in the months ahead", BusinessNZ executive director for manufacturing Catherine Beard said.
The employment sub-index improved to 49.3 from 42.3 in July but also remains in contractionary territory. The three-month average of 46.5 suggests paid hours and employment in the manufacturing sector remains under material downward pressure, Mr Steel said. Deliveries were at 48.0 from 48.9.
The only sub-index to show expansion in August was the finished product stock index, which stood at 53.0 versus 53.1 in July.
"Inventory accumulation, at a time of contracting orders and falling production, only reinforces the notion that manufacturers have been surprised by demand weakness and looks ominous for production ahead," Mr Steel said.
The manufacturing sector was likely to be a drag on next week's second-quarter gross domestic product figures and the "PMI through July and August suggests the sector will also struggle to make a positive contribution" in the third quarter.
BNZ is expecting 0.3% growth in the second quarter versus the 0.5% forecast by the central bank.
The GDP data is due on Thursday.
- BusinessDesk/additional reporting Otago Daily Times