U.K. industrial PMI reaches highest mark since Nov. 2007

The United Kingdom manufacturing sector started the fourth quarter of 2009 on a solid footing, according to the latest data from CIPS and Markit. The seasonally adjusted Purchasing Managers’ Index (PMI) posted a reading of 53.7 in October, to move back above the 50.0 no-change mark and reach its highest level since November 2007. The 3.8-point gain in the PMI from September’s revised figure of 49.9 was the third greatest in the series history.

The headline PMI provides a single figure indication of operating conditions in the manufacturing sector. The index is calculated using data collected on new orders, production, employment, supplier performance and stocks of purchases.

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.

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 eighteenth 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 U.K. 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.

David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, 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 turnaround in the labor market is still some way off.”

Rob Dobson, senior economist at Markit Economics, said: “The latest data are well above the market consensus, with the PMI at a near two-year high and the upturns in output and new orders regaining momentum. 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.  But caution remains the watchword for the sector. Job losses are still running at a fast rate and cost pressures are starting to re-emerge. Official data show that manufacturing employment is at its lowest level since comparable records began and output is at its mid-1992 level. With this and the knowledge that supportive fiscal and monetary conditions cannot be maintained indefinitely in mind, the recent PMI data may represent a positive first step on the road to recovery but the track back is likely to be long and uncertain.”