Manufacturing upswing hailed as ‘remarkable’ as output and new orders post solid gains

The Chartered Institute of Purchasing and Supply's Purchasing Managers' Index (PMI) – a single figure indication of operating conditions in the manufacturing sector calculated using data collected on new orders, production, employment, supplier performance and stocks of purchases – posted 50.8 in July, up from an upwardly revised figure of 47.4 in June, to register a level above the no-change mark of 50.0 for the first time since March 2008. Commenting on the numbers, head of economic policy at the manufacturers' organisation EEF Lee Hopley, said: "The rebound in manufacturing activity from extremely low levels earlier in the year has to be good news and the pick up in new orders is particularly encouraging. With most manufacturing indicators now moving in the right direction, the second half of this year should be notably better than the first half. However, anecdotal evidence from companies shows a lot of uncertainty still remains and manufacturers are likely to be cautious about calling an end to the downturn." The CIPS data showed manufacturing production rising for the second successive month and to the greatest extent since December 2007. Higher output was linked to improved levels of new orders and (to a lesser degree) production lines being restarted following shutdowns during the recession. New orders rose for the first time since March 2008, with the rate of growth the fastest for twenty months. The increase was centred on the domestic market, as new export orders continued to fall (albeit at a slower pace than in June). However, average charges continued to decline sharply, as some manufacturers were offering discounted prices to support sales efforts. The recoveries in output and new orders were broad-based by both company size and sector definitions. However, despite the solid gains signalled for total output and new orders in July, it is worth noting that the recession substantially reduced the overall size of the manufacturing sector. This remained a major factor underlying trends in employment and stock holdings. CIPS CEO David Noble said: "The manufacturing sector has clearly pulled out of the nosedive it was in earlier this year and is no longer plummeting. Firms continued to slash inventories so severely that the downturn has been much deeper than might have been expected. However, output and new orders are both now rising as firms need to order new stock to meet sales. "Whilst this is positive news, the manufacturing sector is still far from healthy and smaller firms continue to bear the brunt. News of the Government's £150m cash injection, though welcome, will only benefit advanced manufacturing. We may have to accept that the face of British manufacturing has changed forever and the sector will stabilise at a much-reduced size than before the recession. If this is the case then employment levels may never return to what they once were." Rob Dobson, senior economist at Markit said the turnaround signalled by PMI data during 2009-to-date had been remarkable. He went on: "After hitting record lows around the turn of the year, indexes for output and new orders moved firmly into expansion territory in July. The headline PMI is also back above 50.0 and came in well above market expectations. The base of the recovery remains broad, which should help with sustaining gains into Q4. The forward looking orders-to-inventory ratio also remained elevated, hitting a three-year high. "Despite the heartening outcome in July, the sector is still reeling from the depth of the recession. Restructuring and cost control efforts remain widespread, job losses are still mounting and inventory positions being unwound at an historically rapid pace. Sales efforts are also being boosted temporarily by heavy price discounting, government stimulus and inventory rebuilding at clients. It will be some time before manufacturers recover fully from the downturn."