UK manufacturing PMI dipped below rising level in August despite  gains in output and new orders. At 49.7, the seasonally adjusted CIPS/Markit UK Manufacturing Purchasing Managers’ Index (PMI) fell from a downwardly revised figure of 50.2 in July (previously reported as 50.8).

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.

August data pointed to a broad-based expansion of manufacturing production. Output rose at SMEs and large-sized producers and in both the consumer and intermediate goods sectors. Signs of weakness were evident in the investment goods sector, however, with output and new orders for capital goods falling back in August. Measured overall, production increased for the third month running and at the fastest pace since December 2007.

Underpinning higher output was a solid increase in new work received and further reductions to backlogs of work in August. New orders have risen in each of the past two months, although the latest rate of expansion was slower than July’s twenty-month high. Sales efforts remained partly dependent on widespread price discounting.

The trend in export orders stabilised in August. Companies reported that conditions in overseas markets were starting to improve. The weakness of sterling also provided support to sales efforts. New export orders rose in the intermediate goods sector, but fell at producers of capital and consumer goods.

Manufacturers continued to focus their efforts towards trimming costs and excess capacity in August. This was reflected in lower staffing levels and holdings of pre- and post-production stocks.

Job losses were recorded for the sixteenth successive month in August amid reports of redundancy and restructuring programmes, natural wastage and the closure of some production lines. Although still substantial, the rate of decline in employment was the slowest since June 2008. Larger-sized companies tended to cut employment at a faster pace than small firms.

August data pointed to further historically rapid reductions in stocks of purchases and finished goods. Manufacturers indicated that destocking was mainly intentional and reflected efforts to align holdings with current sales and production requirements.
Average input costs and output charges declined further in August, but at slower rates than one month ago. Reduced purchase prices were linked to lower raw material costs and improved procurement practices. Declining output charges mainly reflected price discounting to support sales efforts and the pass-through of lower costs to clients.

David Noble, Chief Executive at the Chartered Institute of Purchasing & Supply, said: “The future picture for the UK manufacturing sector is still uncertain, and concerns will remain that the improvements seen in recent months may have been temporary rather than a sustainable recovery. Though August saw the trend in output build on the momentum gained at mid-year, the moderation in the rate of new order growth is worrisome. The investment goods sector in particular showed surprising vulnerability, as domestic and foreign demand for UK capital products fell back following gains in July.

“On the back of subdued global demand coupled with strong competition, deflation is still a concern as output prices continued to fall. Subsequently, firms streamlined their practices and reduced levels of stock. Purchasing managers also reported that workforces were trimmed further along with excess capacity and costs, particularly amongst larger-sized manufacturers.”

Rob Dobson, Senior Economist at Markit said: “The latest UK Manufacturing PMI data are a mixed bag. The recovery in output continued to strengthen with growth at its highest since December 2007 and coming from a broad sector and company-size base. Also positive were the forward looking orders-to-inventory ratio hitting a five-and-a-half year high, export orders stabilising and indications that the inventory cycle will remain supportive. However, the slower growth of new orders, continued substantial job losses and the surprising weakness exhibited by the investment goods sector are all causes for concern. The recovery is likely to continue, but may become more muted later in the year once the initial rebound and monetary and fiscal stimuli have run their course.”

The CIPS/Markit UK Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 600 industrial companies. The panel is stratified geographically and by Standard Industrial Classification (SIC) group, based on the regional, and industry contribution to GDP.