The seasonally adjusted UK manufacturing purchasing managers’ index (PMI) rose to a ten-month high of 52.1 in March 2012, from a revised reading of 51.5 last month, according to a survey of 600 industrial firms conducted between 12 and 27 March 2012 by the Markit/The Chartered Institute of Purchasing & Supply (CIPS).
The PMI is noteable, as it tends to be a strong predictor for the official statistics, which are released quarterly rather than monthly. A PMI of above 50 implies that that sector is experiencing growth, and below hints at contraction. In the historical chart above, the recession is clearly visible – as is the minor dip into shrinkage that may represent a double-dip. We will find out the truth of that later this month.
Improved demand from both domestic and overseas clients, enhanced new orders and efforts to clear backlogs of existing work have led to a further increase in production during March 2012. Cost inflationary pressures are also intensifying due to high oil and metal prices.
Output and new orders expanded throughout the first quarter. New export orders increased for the third time in the past four months.
New export orders increased for the third time in the past four months, reflecting new business wins in Africa, South-East Asia and Japan. Cost inflationary pressures continued to surge higher in March.
Average purchase prices rose at the quickest pace since last August, a marked turnaround from the sharp decrease signalled only two months earlier. Indeed, the extent of the pickup in cost pressures since the start of the year is among the steepest in the 20-year survey history. Manufacturers reported higher prices for electronic components, metals, oil, plastics and transportation.
Increased purchasing costs filtered through to the factory gate, as average selling prices rose at the fastest pace in six months. However, the rate of inflation was substantially below that for costs.
However last month saw little change in the level of manufacturing employment, following a modest increase in the previous month.
Rob Dobson, senior economist at Markit and author of the Markit/CIPS Manufacturing PMI, said:
UK manufacturing has made a brighter than expected start to 2012, with PMI data pointing to output growth of around 0.3 per cent in the first quarter. This is obviously nowhere near a strong pace, but it is at least sufficient to prevent the sector from remaining a drag on broader GDP growth. Inflows of domestic and export orders also showed some improvement in March, but exporters are having to tap markets further afield as conditions in the Eurozone remain lethargic.
A major cause of concern among manufacturers is the recent upsurge in input prices, which mainly reflects high oil prices. While there are few signs currently of this passing through to factory gate prices, it is creating an unwelcome pressure on margins as strong competition restricts firms’ pricing power. Inflation hawks will be watching this trend closely, as margins can only be squeezed so much until producers need to raise prices.
David Noble, CEO at the Chartered Institute of Purchasing & Supply, said:
The continued growth in manufacturing over the past few months points towards a more sustained period of improvement in the sector, and less chance of manufacturing acting as a drag on the overall economy.
However, manufacturers are still under a great deal of pressure to manage costs and are burning through backlogs of orders to maintain production volumes. Headcounts are being kept to a minimum in part to offset the chronic rising cost of raw materials.
The pick-up in domestic demand for consumer goods and reports of new product launches is particularly positive. Reports that companies are building up inventories of finished goods suggests there is anticipation about a possible uplift in consumer spending. The even balance of expansion in new orders from home and markets outside Europe is also encouraging, helping to neutralise the effects of a weak Eurozone.
The Markit/CIPS UK Manufacturing PMI is a composite index based on five of the individual indexes with the following weights: new orders (0.3), output (0.25), employment (0.2), suppliers’ delivery times (0.15), and stock of items purchased (0.1), with the delivery times index inverted so that it moves in a comparable direction.