UK manufacturing turns a corner

Starting the fourth quarter of the year on a solid footing, the index – regarded as a single figure indicator of sector health – posted a reading of 53.7 in October, moving back above the 50.0 no-change mark and reaching its highest level since November 2007. The index is calculated using data collected on new orders, production, employment, supplier performance and stocks of purchases and October's 3.8 point gain from September's figure of 49.9 was the third greatest in the series' history. Underlying the improvement in the headline PMI were marked rebounds in the rates of expansion for both production and new work received. Output increased to the greatest extent since November 2007 as growth of new orders hit a 69-month peak. However, the improvements in both of these components should still be viewed in the context of the unprecedented reductions in their levels seen during the recession, said CIPS. Companies indicated that higher levels of new business encouraged the restart of some production lines. There were also reports of market conditions starting to improve, despite remaining tough overall, and clients moving closer to restocking following a sustained period of inventory depletion. The level of new export business rose slightly for the third month running in October, partly reflecting the weak sterling exchange rate but also improving overseas markets. Looking ahead, the new orders-to-stocks of finished goods ratio – which tends to move in advance of the trend in production – rose to its highest level since data were first collected in January 1992. Staffing levels fell for the 18th successive month in October. Companies linked lower employment to cost control initiatives and redundancies. Although the rate of decline was rapid it was the slowest since June 2008. October data indicated that price pressures were rising in UK manufacturing. Average purchasing costs increased for the second month running, and at the fastest pace since September 2008, mainly as a result of higher commodity prices. Average vendor performance – a reliable indicator of pipeline price pressures – deteriorated to the greatest extent since March 2008. Although output prices continued to fall, the rate of decrease was only marginal. Sector data indicated that the performances of consumer and intermediate goods producers continued to strengthen in October. However, the trend in the investment goods sector continued to run counter to this, with levels of output and new orders falling further. CIPS CEO David Noble (pictured) said: "It appears that the manufacturing sector has turned a corner and is starting to pull itself out of recession. After this long and deep downturn, manufacturers are now reporting strong growth in both output and new orders. However, the sector has been so hard hit since the recession began that it will be a long time before it returns to its previous level. Manufacturing is still fragile and will be highly vulnerable for some time to come. "One of the most positive developments noted by purchasing managers is that their clients are starting to restock inventories, which is encouraging them to restart production lines. This is important as it suggests the growth may be sustainable rather than a short term blip. Though the rate at which firms lay-off staff continues to ease, a turn around in the labour market is still some way off." Rob Dobson, senior economist at Markit Economics said the latest data was well above the market consensus. "Looking ahead, the combination of rising new orders, lean inventories, high orders-inventory ratio and weak sterling all suggest that the sector should continue its recovery," he added before warning that caution remained the watchword for the sector. EEF senior economist, Jeegar Kakkad was also more guarded, saying that although there were signs that industry is beginning to benefit from a weak pound and the ongoing inventory cycle, a strong, sustainable recovery could not be taken for granted.