Posts Tagged ‘pmi’

ID-100109044There are two big question marks hovering over the UK economy. The answers  may determine whether the UK is seeing a temporary recovery or something a good deal more real.

First consider the surveys. Every month Markit and CIPS get together to produce Purchasing Managers Indices (PMIs) covering UK manufacturing, construction and services. Then they add them all together and produce a composite index. Over the last few months these indices have been really rather exceptional. A couple of months back the composite PMI hit an all time high. Okay data only goes back to 1998, even so it was impressive stuff.  Since then the PMIs have fallen back a tad, but they still remain way above historic averages.

Some economists reckon that the PMIs are consistent with quarter on quarter growth of around 1.5 per cent. To put that into perspective, there aren’t many emerging markets growing that fast.

But here is the thing, the hard data from the Office of National Statistics (ONS) is not so good. For the third quarter of last  year the ONS had quarter on quarter growth at 0.8 per cent. That growth rate is good, compared to what we have become used to it is marvellous, but it was less than the level the PMIs were indicating.

As for Q4 of last year, the PMIs suggested that was even better than Q3. Alas, not so the data from the ONS, it had the economy growing by 0.7 per cent. Okay, that growth rate may get revised upwards, but it is still way down on what the PMIs suggest.

Drilling down, construction may provide a partial answer. The ONS had this contracting 0.3 per cent in the last quarter of last year, the PMIs had it surging to its highest level in several years. Since then the PMIs tracking construction have got even better. This suggests that the ONS will either revise its estimate of construction’s contribution to UK growth in Q4 upwards, or we will show a marked improvement in Q1.

The latest PMIs also point to the largest backlogs in orders within the services sector since May 2007. That seems to suggest we are either set to see the sector’s output surge, or we may get rising prices instead. Or both.

Then there is business confidence, in the services sector this rose to its highest level since 2012.

These days, it’s popular to talk about that elephant in the living room. You hear the phrase so often, that is a wonder there are any elephants left in the wild, so busy are they filling up our livings rooms. Well apologies for adding to living room congestion, but as far as the UK economy is concerned there are two elephants in the living room

Elephant number one is household debt/house prices. Part of the UK’s recovery is coming on the back of rising house prices, making households feel richer, encouraging them to spend more. This is not new, the idea that the government is repeating the mistakes that led to the finance crisis in the first place is rehearsed most days in the media, and indeed by politicians.  Some deny it of course. But one piece of hard data needs to borne in mind. The fact is in Q3 of last year the savings ratio fell, this was the main contributor to growth. We haven’t got the data for Q4 yet. But given the imminent retirement of the baby boomers, is creating growth via less households savings really a good idea?

The other elephant in the living room is cash sitting on corporate balance sheets. If they could be persuaded to spend it, ideally invest it, the UK economy would boom like it hasn’t done for a very, very long time.

Just to remind you, according to the PMIs work backlogs are soaring, business confidence is rising, might that be enough to get companies spending again?

345

If 10cc were to write a song about the latest surveys on the UK economy they might say: “I don’t like surveys. Oh no, I love them.” The fact is that the surveys are not just good; they are remarkable, but can they really be right?

It was told here on Tuesday how the latest Purchasing Managers’ Indices (PMIs) on UK manufacturing and construction were pretty darned impressive. The last index tracking manufacturers’ output and another for new orders, both produced by Markit/CIPS each rose to their highest level since 1994. Another index, this time tracking construction, rose to its highest level since 2007.

Then yesterday came the PMI for services, and a composite index which combines the PMI readings for manufacturing, construction and services. The PMI for services rose to its second highest level in the 15 year history of the index – the record was set in December 2006.

As for the composite PMI, this rose to 60.7. Now you might say 60.7 what? Well to put this reading in context, any score over 50 is meant to be consistent with growth. And the 60.7 reading just happens to have been the highest reading ever recorded during the 15 years that these composite indices have been produced.

So what does this mean? Markit reckons its surveys points to growth in Q3 of between 1 and 1.3 per cent compared to Q2.

Also this week, the OECD was busy revising upwards. It is one of those strange-but-true quirks that forecasters tend to revise their predictions downwards when we enter a downturn, and revise upwards when we exit. The OECD is now predicting that the UK economy will expand by 3.7 per cent in Q3 on an annualised basis. Incidentally, if its forecasts are right the UK will be the fastest growing economy across the G7 in the second half of this year. But if the PMI indices are right, the OECD will in fact be understating the truth.

So far then it is all good stuff.

Can it last? It is clear that the Help to Buy Scheme has helped to buy the UK economy more growth. The danger remains, however, that the chancellor is creating growth from a new housing bubble. The Bank of England dismisses this, but do members of the MPC, for all their cleverness, understand the British psyche, and how prone it is to getting behind housing booms, even when they are built on smoke, mirrors and the naive belief that interest rates will stay at near record lows for the 25 years during which they still have a mortgage.

But there are reasons for hope, however. Take for example the news that Nissan is creating 1,000 new jobs, as it expands its factory in Sunderland – a car factory by the way that some people claim is the most efficient in the world.

Or take UK trade. Since the end of 2011, UK imports have grown by 5 per cent and exports by 6 per cent. According to the ONS, UK exports to the BRICS countries as a percentage of total UK exports have increased from 2.6 per cent to 9.1 per cent over the last 15 years. 6.0 percentage points of this rise have occurred since 2006. Okay imports have risen too, but in the last couple of years UK exports growth to the BRICS has outstripped import growth to those same countries.

It is just a shame the chancellor cannot put the same level of commitment into what we might call a Help for Business Scheme as he has put into the housing market.

© Investment & Business News 2013

file4741270417603

The Bank of England says a rate hike is not likely until 2016; the markets are pricing in a 2015 hike. But might they rise even sooner than that?

These days it’s about unemployment. The Bank of England now says that for as long unemployment is above 7.0 per cent it won’t be upping rates. It says this is not likely to happen until 2016, that the markets are too optimistic, and that there is just a one in three chance of a rate hike sooner than that.

One of the lessons of the last few years is that when the economy is entering a downturn, economists and markets alike tend to underestimate the speed of contraction. Yet it seems equally clear that when things are improving, markets and economists tend to underestimate the speed of recovery.

The OECD has joined a long list of economic forecasters to revise its projections for UK growth upwards. The latest Purchasing Managers’ Indices (PMIs) from Markit/CIPS point to quarter on quarter growth of between 1 and 1.34 per cent in Q3. In fact, the latest composite PMI tracking construction, services and manufacturing has hit its highest level ever since records began in the late 1990s.

So if the UK economy is expanding so much faster than the wildest optimists forecast just a few months ago, is it not possible that UK unemployment will be back to 7 per cent faster than both the Bank of England and markets are predicting?

Yet more evidence to support this case comes from recent data from the ONS. It has recently begun experiments with month on month data on UK unemployment and recorded a fall from 7.8 to 7.4 per cent in July. A recent survey from the CIPD has its headline index tracking employers’ intentions to hire more staff hitting its highest level since 2008. The PMIs for July pointed to the fastest rate of job creation since 2007. And if we really do see the boom in residential construction that many are predicting, the effect on employment will surely be significant.

There are problems with these rosy forecasts, however.

For one thing, data on month on month changes in the jobs markets are highly volatile – the August data may see July improvement cancelled out. The PMI for August may have pointed to faster growth, but as far as job creation is concerned, it was nowhere near as positive as the July reading.

The big doubt related to what they call the productivity puzzle.

Until recently a characteristic of the UK economy has been disappointing growth in GDP, but surprisingly robust jobs figures given the state of the economy. Of course the mathematics of poor growth but reasonable job creation has meant poor productivity. Lots of theories abound for the poor growth in productivity, with one of the most popular being that employers have been choosing labour which has low upfront costs, over investment into capital equipment. In other words, they prefer staff, who they can always fire, to labour efficient machinery which requires a bit of upfront outlay, and cannot not be easily sold. Is it not possible that as the economy improves, so will productivity, and just as unemployment was relatively low in the recession, it will be relatively high in the recovery? If that is right, then interest rates may stay at half a per cent for some time yet – regardless of whether the recovery exceeds expectations.

© Investment & Business News 2013

file000712580802

It was good news across most of the world yesterday – at least it was good news as far as manufacturing went. And for the UK, which really needs a recovery made of more than just rising house prices, the news was especially good. Nay, ignore that. It was spectacularly good. Can it last?

Do you remember the summer of 1994? In July a chap called Tony Blair became the new leader of the British Labour Party. In August the Provisional Irish Republican Army declared a cease-fire. In that summer Brian Lara scored the highest individual score by a batsman in first class cricket and Wet Wet Wet’s song ‘Love Is All Around” went to number one and stayed there for what seemed like forever.

Something else happened in 1994. The Purchasing Managers’ Index (PMI) tracking UK manufacturing saw its index for manufacturing output and another tracking new orders hit a peak. Neither of the indices has been higher since.

But in August 2013, according to the latest PMI for Markit/CIPS, the index tracking output rose to its highest levels since July 1994, and as for new orders, this hit its highest point since August 1994.

Not a bad set of results.

That does not mean, however, that the latest data was all good. According to the Markit/CIPS report, input prices rose at the highest rate for two years.

The overall PMI takes it all into account: new orders, output input prices and a number of other measures. The surge in input prices meant that overall the index scored 57.2. That was a two year and a half year high. To put the reading into perspective, any score over 50 is meant to suggest growth.

The truth is that the apparent recovery in manufacturing across these shores provides genuinely encouraging news on UK plc.

A recovery led by rising house prices and consumers running up debt would be worrisome. One led by manufacturing, investment and exports, especially if those exports are to emerging markets which are themselves growing, is more encouraging. Right now, there are signs that the UK is enjoying both.

But, sorry to introduce a niggle, the index tracking new export orders points to growth, but it has not risen for a while now. Some fret that this may be a sign that much of the UK recovery in UK manufacturing is being led by internal demand, which itself is coming off the back of leverage.

The hope is we will get a kind of virtuous upwards circle. Remember, at the moment wage rises are lagging behind inflation. If consumers are spending more on average, they are doing this by running up debts. But if as a result of this, manufacturing output rises, and we see a rise in construction – especially residential construction – then we may see the creation of more better-paid jobs. This may help to create a more sustainable recovery. The fear is that we are just re-running the noughties. Back then consumers ran up debts, they spent, and the UK economy became more and more imbalanced.

What we need is more investment. Alas the latest lending data points to more mortgage lending and less business lending. It is tempting to say that the UK has the same old weaknesses, and that despite a very severe recession, nothing has really changed.

It may be more accurate to say we have seen changes, but also that banks and their models have not changed much. Before 2008, it was they who loved providing mortgages, but were reluctant to provide what they saw as high risk business loans. They feel the same today.

© Investment & Business News 2013

file7841246044564

This morning the latest Purchasing Managers’ Index (PMI) on UK construction was out, and boy was it good. It was especially good for residential construction.

The headline PMI for UK construction hit 59.1 – that is seasonally adjusted by the way. To put this in context, any score over 50 is mean to denote growth. It was the highest reading since September 2007.

Residential construction remained the strongest performing sub-sector, with output rising at the fastest pace since June 2010.

It seems the government’s Help to Buy scheme and public sector infrastructure spending have largely been behind the improvement.

David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, said: “A new dawn is breaking in construction…. Builders have seen a step change in recent months and are now starting to show their true potential to the UK economy. Nowhere is this more true than in new business, where growth is at its second-strongest in almost six years, leading to more jobs and increasing confidence.

“Robust expansion can be seen in all three sub-sectors; house building is rising at a rate not seen since mid-2010, commercial growth is also strong, but it is the strongest growth in six years recorded in civil engineering that is a real cause for optimism and a sure sign the sector has overcome its previous difficulties.

“This new direction brings new challenges, not least the prospect of additional work and insufficient capacity to meet demand. How the sector navigates these tensions and manages the supply chain could come to define its performance over the coming months.”

© Investment & Business News 2013

file0001216055275

31 July 2013, and 1 August 2013: mark these dates in your diary. On these days economic news was revealed that meant one of two things; either the economy was well and truly on the mend, or we are seeing one very big blip. If it is the former, celebrate; if it is the latter enjoy it while it lasts.

They hadn’t expected much. Purchasing Managers’ Indices (PMIs) suggested the US economy had a rotten Q2. Sure, said the optimists, Q3 would be better, but the second quarter of this year was one we would rather forget. Then on 31July 2013 the hard data was released and it told a very different tale.

The US economy expanded at an annualised rate of 1.7 per cent in Q2, and by 1.4 per cent year on year. That was much better than expected, much better than the PMIs suggested.

Both business investment and residential investment helped – in the US when house prices go up so does construction, unlike in the UK where the correlation seems only very vague.

So that was the US. The news was good in the Eurozone too. The latest PMI from Markit on manufacturing in the region was out yesterday and it rose, hitting a two year high, with a reading of 50.3. To put that in perspective, any score over 50 is meant to correspond to growth. A reading of 50.3 is nothing special, but by recent standards it is positively wonderful.

Broken down by country things look like this:

Ireland,   51.0,    5-month high
Netherlands   50.8   24-month high
Germany   50.7   18-month high
Italy   50.4   26-month high
Spain   49.8   2-month low
France   49.7   17-month high
Austria   49.1   8-month high
Greece   47.0   43-month high

And finally we turn to the UK. The latest PMI for UK manufacturing rose to 54.6, a 26 month high. And get this. According to Markit which compiles the data along with CIPS: “New export business rose at the fastest pace for two years, reflecting increased sales to Australia, China, the euro area, Kenya, Mexico, the Middle East, Nigeria, Russia and the US.”

Apologies for raining on such a pleasant parade, but the story was not good everywhere. In Russia and Turkey the PMIs fell sharply and look worrisome, in China the picture is mixed, with the official PMI pointing to a modest pick-up and the unofficial PMI from HSBC/Markit, which puts more weight on smaller companies, deteriorating.

Still with the PMIs, the news on Poland and the Czech Republic was much better. Watch these two countries closely, especially Poland. If there is truth in all this talk about reshoring, Poland, with its proximity to the developed part of Europe, may be a big beneficiary.

One worry is that other data out yesterday showed that Sweden contracted in Q2. The out and out bears – those who are cynical for a living – question the PMIs. They say they did not predict the slow-down in Sweden; they did not predict the pick-up in the US, and they are giving a misleading picture on Europe. The big fear relates to central bankers tightening policy as a result of this data. The Fed may accelerate its plans to ease back on QE.

As for the European Central Bank, it is cautious and conservative to a T. There is a permanent danger it will lose its nerve, and tighten again, sending the Eurozone back into recession.

© Investment & Business News 2013

file7181334521100

The numbers say what the numbers say. It may not feel right; it may defy reason, but there are reasons to think the Eurozone may be set to exit recession.

The latest flash Purchasing Managers’ Index tracking Eurozone manufacturing and services hit an 18 month high.

That is good, but especially encouraging was that the July index was 50.00, which is good news because 50 is seen as the key level. Anything below 50 is supposed to correspond with contraction; anything above signifies growth. Okay, a reading of 50 is not that remarkable, and this is just the flash reading, meaning that it is an early estimate. But it is a good sign, nonetheless.

Markit, which compiles the data, said: “Manufacturers reported the largest monthly increase in output since June 2011, registering an expansion for the first time since February of last year. Service sector activity meanwhile fell only marginally, recording the smallest decline in the current 18-month sequence and showing signs of stabilising after the marked rates of decline seen earlier in the year.”

In Germany output rose at the fastest rate for five months. Service sector growth hit a five-month high while manufacturers reported the steepest monthly increase in output since February of last year. Overall job creation hit the highest since March.
As for France, the PMI hit its highest level since March 2012. It’s not the only good news out of France of late. An index showing that morale in the industrial sector recently rose for the fourth month running, led the French Finance Minister Pierre Moscovici to say: “Nous sommes en sortie de recession,” or “We are out of recession.”

On the other hand, the index measuring French industrial morale is still below the historic average. The PMI was up, but at 48.8 still pointed to contraction, and in any case, France has to enforce much more substantive reforms to its labour market before it can claim its struggle is over.

Ben May, European economist at Capital Economics, said: “There are some signs that the euro-zone economy is on the mend and might perhaps soon exit recession. Nonetheless, the PMI and other business surveys have signalled several false dawns in the recent past. What’s more, with banks still reluctant to lend and demand for credit remaining weak, it is still too soon to conclude that the region is in recovery mode.

© Investment & Business News 2013