Manufacturing output at 13 month high

The authoritative monthly Chartered Institute of Purchasing and Supply (CIPS) purchasing managers index published today (1 July) showed the UK manufacturing sector taking another step closer to stabilisation in June. At 47.0, up from 45.4 in May, the seasonally adjusted Purchasing Managers' Index (PMI) – a composite index based on data for new orders, production, employment, suppliers' delivery times and stocks of purchases – posted its highest reading since May 2008. However, the headline PMI has now posted below the neutral 50.0 mark for 15 months running, its longest sequence below this level. The performance of the sector in Q2 2009 was a noticeable improvement on that signalled for the opening quarter of the year. Average index readings for the headline PMI and those tracking trends in output, new orders, new export orders, employment, stocks of purchases, purchasing activity and backlogs of work were all noticeably higher in Q2 than in Q1. Manufacturing production rose for the first time since March 2008 in June. The upturn was broad- based by sector – with gains recorded across the capital, consumer and intermediate goods categories – and according to company size. New orders and stocks of finished products fell again in June, indicating that the expansion of output was mainly focused towards reducing backlogs of work. However, rates of decline in new work received and post-production inventories eased during the latest survey period. The drop in total new orders was only modest and the weakest during the current 15-month period of decline. Companies reported that conditions in both domestic and export markets remained weak overall. However, others noted that successful promotional activities, new product launches and price discounting were supporting sales volumes. Manufacturing employment declined for the 15th successive month in June. The rate of reduction in staffing levels remained substantial, but eased further from February's record to its weakest since last August. Job losses mainly reflected redundancies, restructuring programmes and cost-control initiatives. Lower prices for chemicals, metals and plastics led to a further decline in average purchasing costs in June. Input prices have now fallen for eight months in a row. The use of price discounting in order to support sales efforts resulted in a further drop in average output charges. However, the rate of deflation remained slower than that signalled for purchasing costs. Companies also attributed lower prices at the factory gate to weak market conditions. A preference for reduced holdings of raw material inventory led to a further cutback in purchasing activity in June. However, the rate of decline in input buying volumes slowed to its weakest for fifteen months. David Noble, the Institute's CEO, said the latest data suggested that after months of gloom and doom, there were some signs of relief for the sector. "One of the reasons for this improvement may be that firms are adapting to market changes. Many are expanding their promotional activities and becoming more willing to discount goods in order to secure even the slightest hint of demand," he went on. "However, that such data can be read so positively really highlights how bad things have been over the past fifteen months. Employment levels are still falling which demonstrates that we still have a long way to go before the sector returns to full health." However, Rob Dobson, senior economist at Markit, said it was still too early to call an end to the downturn and forthcoming PMI releases would play an important role in identifying where manufacturing and the broader UK economy were heading later in 2009. EEF head of economic policy Lee Hopley said:"While the rise in the manufacturing activity index is encouraging and in line with evidence we have passed through the worst of the storm, it comes after months of significant falls. We must be cautious about calling the first increase in output in 15 months the start of a sustained upswing for manufacturing, as the road to recovery is likely to be a long and uncertain one."