Manufacturing expansion remains sluggish

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The performance of UK manufacturing remained sluggish in August as the continued strength of the consumer goods sector was again offset by lacklustre output growth at intermediate goods producers and the ongoing downturn in the capital goods industry.

The headline seasonally adjusted Markit/CIPS Purchasing Manager's Index (PMI) dipped slightly to 51.5 in August, from 51.9 in July and well below the average for the current near two-and-a-half year sequence of expansion (54.2). August saw a modest increase in manufacturing production, as companies scaled up output in response to rising levels of new business.

Rates of expansion accelerated to five-month highs, but remained below averages for the current upturn. The domestic market remained the main pillar of new order growth, as the level of new export business decreased for the fifth straight month.

Companies linked reduced overseas demand to the sterling exchange rate, weak sales performance to the eurozone and the slowdown in China. On the costs front, there was a substantial drop in purchase prices during August.

Average costs declined at one of the steepest rates during the past 16 years, with marked reductions reported across the consumer, intermediate and investment goods sectors. This reflected a combination of lower oil prices, the sterling exchange rate and reductions in the costs of a wide range of raw materials.

Although average selling prices continued to rise in August, the rate of inflation was near-stagnant and below July's 11-month high. The vast majority of companies (over 90%) reported no change in their average output charges during the latest survey. The trend in employment turned mildly negative during August, with a negligible reduction in staff headcounts reported following a 25-month sequence of job creation.

Cuts were mainly centred on large-sized manufacturers, as SMEs continued to add (on average) to their payroll numbers. Average vendor lead times lengthened for the twenty-seventh successive month in August, albeit to the least marked extent during that sequence. Where a deterioration in vendor performance was reported, this was attributed to capacity issues at suppliers and ongoing disruptions at the Channel crossing.

Manufacturers reported a preference for reduced inventory holdings in August, as stocks of purchases and finished goods were both depleted. The former was the result of lower levels of purchasing activity.

Lee Hopley, chief economist at EEF, the manufacturers' organisation, said: "Manufacturing activity continued to expand in August, thanks mainly to UK consumers. Low inflation, a pick-up in real wage growth and decent labour market indicators have underpinned the resilience of UK demand for the industrial sector. That said, the volatile oil price is doing little to revive demand in the investment goods sectors. Moreover, the rest of the world is doing rather less to support growth, with export sales weakening further as a result of ongoing challenges in Europe and mounting concerns about the growth outlook in China and other emerging markets."

She added: "Particularly notable over the month is the drop in employment, which could signal an end to the job growth the sector has seen over the past two years. All in all, there is little in the data to indicate that manufacturers are set to see renewed growth momentum in the coming quarters."

Rob Dobson, senior economist at survey compiler Markit, said: "The UK manufacturing sector remains in a holding pattern, with production growth hovering around the stagnation mark and marginal job losses reported for the first time in 26 months. On this basis, the sector looks unlikely to make much of a contribution to the solid gain in broader GDP growth expected for the third quarter. On the price front, input costs fell at one of the sharpest rates during the past 16 years and selling prices were broadly unchanged."