Manufacturing output rises but slower orders cast a shadow

At 49.7 in August, the seasonally adjusted UK Manufacturing Purchasing Managers' Index (PMI) – a single figure indication of operating conditions in the manufacturing sector from the Chartered Institute of Purchasing and Supply (CIPS) – moved back below the no-change mark of 50.0. August data pointed to a broad-based expansion of manufacturing production. Output rose at SMEs and large-sized producers and in both the consumer and intermediate goods sectors. Signs of weakness were evident in the investment goods sector, however, with output and new orders for capital goods falling back in August. Measured overall, production increased for the third month running and at the fastest pace since December 2007. Underpinning higher output was a solid increase in new work received and further reductions to backlogs of work in August. New orders have risen in each of the past two months, although the latest rate of expansion was slower than July's twenty-month high. Sales efforts remained partly dependent on widespread price discounting. The trend in export orders stabilised in August. Companies reported that conditions in overseas markets were starting to improve. The weakness of sterling also provided support to sales efforts. New export orders rose in the intermediate goods sector, but fell at producers of capital and consumer goods. Manufacturers continued to focus their efforts towards trimming costs and excess capacity in August. This was reflected in lower staffing levels and holdings of pre- and post-production stocks. Job losses were recorded for the sixteenth successive month in August amid reports of redundancy and restructuring programmes, natural wastage and the closure of some production lines. Although still substantial, the rate of decline in employment was the slowest since June 2008. Larger-sized companies tended to cut employment at a faster pace than small firms. August data pointed to further historically rapid reductions in stocks of purchases and finished goods. Manufacturers indicated that destocking was mainly intentional and reflected efforts to align holdings with current sales and production requirements. Average input costs and output charges declined further in August, but at slower rates than one month ago. Reduced purchase prices were linked to lower raw material costs and improved procurement practices. Declining output charges mainly reflected price discounting to support sales efforts and the pass-through of lower costs to clients. CIPS CEO David Noble said: "The future picture for the UK manufacturing sector is still uncertain, and concerns will remain that the improvements seen in recent months may have been temporary rather than a sustainable recovery. Though August saw the trend in output build on the momentum gained at mid-year, the moderation in the rate of new order growth is worrisome. The investment goods sector in particular showed surprising vulnerability, as domestic and foreign demand for UK capital products fell back following gains in July. "On the back of subdued global demand coupled with strong competition, deflation is still a concern as output prices continued to fall. Subsequently, firms streamlined their practices and reduced levels of stock. Purchasing managers also reported that workforces were trimmed further along with excess capacity and costs, particularly amongst larger-sized manufacturers." Rob Dobson, senior economist at report sponsor Markit said the latest data was a mixed bag. "The recovery is likely to continue, but may become more muted later in the year once the initial rebound and monetary and fiscal stimuli have run their course."