Indonesia manufacturing activity records 3-month expansion in September

Manufacturers ramp up employment at fastest pace in 5 months.

Indonesia's manufacturing sector registered a modest improvement in operating conditions at the start of the fourth quarter, with factories expanding their workforce at the steepest rate since May in response to strengthening domestic demand.

The S&P Global Indonesia Manufacturing Purchasing Managers' Index rose to 51.2 in October, up from 50.4 in September, marking the third consecutive month of expansion. Any reading above 50 indicates growth.

Central to the upturn was an accelerated expansion in new orders, which increased at the joint-strongest pace since March. Survey respondents reported that domestic market activity had improved, encouraging local clients to place additional orders.

However, the growth was entirely driven by the home market, as manufacturers pointed to a second successive fall in new export business amid reports of largely subdued demand in international markets.

Production levels remained unchanged from September, with any gains from rising domestic orders offset by sluggish foreign demand. Some firms reported using existing stocks to fulfil incoming orders, resulting in a fractional decline in post-production inventory holdings.

Despite the stabilisation in output, positive sales movements encouraged firms to increase capacity, with employment levels rising for the third consecutive month. The pace of job creation in October was the steepest recorded in five months.

The expansion has come alongside mounting inflationary pressures. Factory cost burdens rose at the strongest rate in eight months, with manufacturers widely attributing the increases to higher raw material prices. Input price inflation reached its highest level since February.

Usamah Bhatti, economist at S&P Global Market Intelligence, noted that whilst demand conditions were positive, "price pressures remained acute, with goods producers citing the sharpest uptick in average cost burdens in eight months."

However, firms proved hesitant to pass these costs fully on to customers. Selling prices rose only marginally as manufacturers attempted to remain competitive on price, Mr Bhatti said, adding that factory gate charges increased fractionally "as part of efforts to remain competitive."

October's data also pointed to emerging pressure on suppliers, with average lead times lengthening for the first time in three months. Panellists reported shipping delays and road repairs as contributing factors to the slower deliveries.

Purchasing activity rose for the third consecutive month, albeit modestly, with some firms storing inputs in response to improving demand and production requirements. Pre-production inventories were also raised during the period.

Pressure on existing capacity remained soft, with backlogs of work declining for the seventh month running, though the pace of depletion was marginal and the slowest since June.

Looking forward, confidence regarding the 12-month outlook dipped from September's level and remained below the series average. Nevertheless, the Future Output Index still indicated robust optimism for the coming year, underpinned by expectations of stronger demand conditions and new product launches.

Mr Bhatti said the improvement in sector health "boded well for the coming months," though he noted that production volumes "appeared to lag slightly," coming in at neutral levels as some manufacturers exhausted existing inventories of finished items.