UK plc's one bright spot dims as manufacturing growth tumbles

The Purchasing Managers Index fell more sharply than expected in March, to a five month low of 57.1.

by Andrew Saunders
Last Updated: 01 Aug 2011
The size of the decline is substantially greater than predicted - analysts reckoned only a modest half a point would be trimmed from last month’s 60.9 score. In fact it’s the largest one-month fall in the PMI since the dark days of Nov 2008. The drop is particularly significant because manufacturing has so far been the one real bright spot on UK plc’s otherwise rather gloomy economic horizon.
But what does it mean? Well the PMI survey is conducted monthly by the Chartered Institute of Purchasing and Supply and RBS, and as the name suggests it polls purchasing managers on their spending. The idea being that if purchasing of raw materials and other supplies is up, then so are the order books and business is looking good. If purchasing is down however, the opposite is true. It’s proved to be a useful and quick to respond indicator of manufacturing activity in recent months.
So a reduction in the index is nothing to shout about, especially as the underlying data suggests that new orders are falling at their fastest rate for seven years thanks to reduced demands both at home and abroad. And just to complete the glum picture, factory gate prices have also been rising, with the companion Output Prices Index surging up to 65.2 from 63.6, its highest monthly jump since 1999.
What’s going on? Well, the speculation is that a combination of factors are at work here - everything from the Japanese tsunami to government spending cuts has been in the frame, with input cost inflation blamed for pushing up prices.
Particularly badly hit has been the consumer goods sector, where the decline in domestic demand has resulted in virtual stagnation - cash-strapped punters seem to have stopped buying. Export led businesses are doing rather better however, thanks in part at least to the weak pound - which fell further against the dollar on the news.
But for all that the reported fall is bad news, manufacturing industry is still expanding - any figure over 50 indicates growth. And manufacturers are still making more money and cresting more jobs, so there is room for optimism overall.  And following on from disappointing GDP data recently, it’s also yet another reason why the MPC will have to think twice or even three times before raising the interest rates just yet.

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