May saw downturn in UK manufacturing output, new orders and employment ease

*          Manufacturing PMI hit twelve-month high.

*         Output, new orders and employment all fell at slower rates.

*          Consumer goods sector records growth of production and new business.

Coming in at 45.4 in May, the seasonally adjusted CIPS/Markit Purchasing Managers Index (PMI) remained below the no-change mark of 50.0 for the thirteenth successive month equalling its longest ever sequence below this level. However, after rising for the third month running, and from an upwardly revised figure of 43.1 in April, the PMI posted its highest reading for a year.

Production and new orders continued to decline in May, but at the slowest rates for twelve and fourteen months respectively. Companies scaled back output in response to reduced new order volumes and as part of efforts to lower stock holdings. Manufacturers noted reluctance amongst clients to spend.

The cyclically-sensitive orders-to-inventory ratio which tends to lead the production cycle rose to a thirty-two month high in May.

For output and new orders, large-sized companies fared better than SMEs. The capital goods sector vastly underperformed relative to the consumer and intermediate goods sectors, as clients remained unwilling to expedite new capital spending during a recession. Consumer goods producers reported an increase in production for the first time in fourteen months, following a slight gain in new orders. Rates of contraction for both variables eased noticeably in the intermediate goods sector.

May data pointed to a decline in manufacturing employment for the fourteenth consecutive month, with the rate of reduction remaining rapid. Job losses were generally linked to efforts to cut costs through redundancy and workforce restructuring initiatives. However, the extent of the reduction in staffing levels eased for the third month running to its least severe since last October.

New export orders declined for the fourteenth successive month in May and at a much faster rate than in April. Companies reported lower levels of new work received from clients in the US, mainland Europe and Brazil.

After accelerating through the year-to-date, the rate of decline in average input prices was the strongest since February 2002 in May. The costs of chemicals, paper, polymers and steel were all reported to be lower than in April.

Weak demand and lower input prices led to a marked reduction in average output charges in May. A number of firms reported that discounted prices had been offered to secure new contracts.

May data pointed to further marked reductions in pre- and post-production stocks. Purchasing activity also declined during the latest survey period, but to the least marked extent in a year.


Roy Ayliffe, Director at the Chartered Institute of Purchasing & Supply, said;

UK manufacturing looks like it may be close to turning the corner as the May PMI posted its strongest reading in twelve months. At this rate we would hit the no-change 50.0 PMI benchmark by Autumn significantly earlier than economists initially predicted. Moreover, as demand for export orders dampened and domestic orders grew, it could be that the UK is recuperating faster than its key export markets.

However, despite these slight improvements in overall trading conditions, caution is hot on the lips of UK manufacturers struggling to survive the onslaught of the recession. Purchasing managers from larger firms report they are making a quicker comeback than SMEs which are still battling away at the front line.

Rob Dobson, Senior Economist at Markit said:

The headline PMI came in better than market expectations in May, reaching a twelve-month high. Although the PMI remains below levels consistent with outright recovery, this is a further sign that the downturn in UK manufacturing is easing. Indexes for output and new orders followed similar trends. The marked slowing of the recession signalled by the data, combined with a rise in the orders-to-inventory ratio to a thirty-two month high, suggests that the PMI and output index could reach stabilization levels within the next three months.

The performance of consumer goods producers was especially heartening in May, with output rising for the first time in fourteen months. However, this is offset by the continued weakness of the capital goods sector. Large companies tend to be faring better than SMEs.

The June Report on Manufacturing will be published on Wednesday 1st July 2009 at 9.30am


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