Factory Output Fortunes Varies

A key indicator in most modern economies is how the manufacturing sector is performing. The importance of the sector to an economy depends on where the balance lies between manufacturing and service sector activities (anything from the financial sector to the catering and entertainment industries). One key indicator which is used as a barometer of manufacturing output performance is the Purchasing Managers’ Index (PMI). The PMI figure is based on new orders; inventory (stock) levels; production; supplier deliveries and the employment situation.

Three important economies have just released data for their manufacturing sectors: China, the UK and the USA and they provide a mixed picture. The PMI figure is a range with values below 50 indicating a contraction in the sector and values above 50 representing expansion. By comparing successive readings, trends can be discerned – is the sector slowing or is output picking up.

The Chinese PMI figure for October came in at 49.8, indicating a contraction and is the third successive declining figure, showing that output is indeed falling. The official Chinese growth figure for Q3 came in at a healthy 6.9%, but this is the weakest growth figure since the onset of the Global Financial Crisis. The modest growth and PMI data are leading to speculation that China may indulge in further monetary easing soon.

The USA manufacturing PMI figure still indicates expansion, but only just, coming in in October at 50.1. This reading is the fourth straight monthly decline, showing that the sector is slowing and, indeed, is the slowest rate of expansion seen since May 2013. A strong US Dollar hurts exports and this is being cited by some as a reason for the cooling of output. If so, it makes an interest rate hike at the Federal Reserve’s final meeting of 2015 even less likely since it would push the Dollar higher against other currencies (unless they too raised rates).

The UK economy is dominated by its service sector, but there is still a significant manufacturing base (although the days of the UK being home to substantial heavy industry plant are long gone). The October PMI figure came in at 55.1 up strongly from a September reading of 51.8 and the best reading since June of last year. The data is particularly pleasing because detailed examination of the ONS quarterly figures for Q1 and Q2 showed a recession in UK manufacturing with contractions of 0.3 and 0.5% respectively.