A modest rebound in orders failed to prevent August’s manufacturing contraction, leaving businesses caught between weak demand and costly inputs.
Indonesia’s manufacturing sector slipped back into contraction in August 2026, underscoring the fragility of July’s recovery. Factories reduced production and employment even as new orders showed tentative improvement.
S&P Global’s Indonesia Manufacturing Purchasing Managers’ Index fell to 49.8 from 50.2 in July. The index measures changes in business conditions from the previous month, with readings above 50 signalling expansion and those below it indicating contraction.
August’s reading was only marginally below that threshold. The more consequential finding was persistence: both production and employment declined in five of the past six survey periods.
Key findings:
- Manufacturing PMI: 49.8 in August, versus 50.2 in July.
- New orders: rose slightly for the first time in three months.
- Production and employment: resumed declining after July’s improvement.
- Business confidence: climbed to a seven-month high.
Manufacturers attributed weaker output to subdued demand, stronger competition and higher costs. Some businesses reduced staffing because production requirements had fallen; others reported difficulties maintaining headcounts following voluntary resignations. The employment decline therefore reflected several pressures, rather than layoffs alone.
Demand offered limited reassurance. Although some companies received more customer enquiries and orders, those gains were offset by weak purchasing power and competitive pressures.
Bank Mandiri’s economic review also highlighted expensive raw materials and increased supplier charges. For manufacturers, these conditions could compress margins: passing costs through to selling prices risks discouraging customers, while absorbing them reduces funds available for investment and hiring.
There were signs that businesses were preparing for better conditions. Purchasing activity stabilised after five months of decline, input inventories increased for the first time in five months, and confidence strengthened. Nevertheless, expectations of higher future output had yet to translate into stronger current production.
For investors, the distinction matters. Rising confidence is encouraging, but sustained orders, improving capacity use and renewed hiring would provide firmer evidence of recovery. A near-neutral PMI reading alone offers little basis for assuming a broad earnings rebound.
Bank Mandiri identified accelerated government spending and second-half economic stimulus as potential supports. The policy challenge is turning those measures into dependable demand while easing business costs.
For factory managers, September’s order books will help determine whether August’s improvement in sales was enough to justify rebuilding production—or whether cash preservation should remain the priority.