A closely watched index released yesterday suggested that UK manufacturing saw a strong rebound in August. The pound rose on the news, and across the media, it is being hailed as proof that Brexit fears were overdone. The reality is not exactly the opposite, but it is quite different.
Purchasing managers’ indexes, or PMIs, are released every month and have been for years. Yesterday, PMIs for August covering manufacturing were released.
Here is some background:
The PMIs are typically compiled by Markit, but not always. In the UK we get three: one covering manufacturing, one for construction and one for services. In most other large economies there are just the two: manufacturing and services – or in the case of the US, manufacturing and non-manufacturing. For some smaller or emerging economies we only have PMIs for manufacturing.
For both China and the US, there are two rival versions. The story of the latest PMI for China, was told here yesterday.
And finally, one more bit of background information for you, in the world of PMIs, 50 is the key score. Any reading under is meant to suggest contraction, and over is meant to suggest growth.
In July the manufacturing PMI covering the UK fell sharply, falling to 48.3, pointing to contraction. Some reacted with horror, and said this proved what a disaster the Brexit vote was.
The reality is different. As was pointed out here a few weeks ago, there are no good reasons why a vote, that may not get turned into anything real for years, would immediately have led to a UK recession. It will be a long time before we know what effect Brexit – whatever Brexit means – will have on the economy.
The PMI covering August rose very sharply, this time up to 53.3.
Or put it another way, July saw the index drop to a 41-month low, August saw the index rise to a seven-month high.
Of all the major economies across the world, only in Germany was the manufacturing PMI for August higher, and even there only by a small margin.
Comparing the UK with the US, August was a bad month across the pond, although the US picture is muddied by the fact that there are two rival PMIs. The version produced by Markit, fell very slightly to 52.0 – an okay reading. But the much more established version of the PMI, produced by ISM, saw something of a collapse, dropping to 49.4 from 52.6. Frankly, data on the US economy is all over the place at the moment – some data points to strong recovery, other data, such as the ISM PMI, is much more disappointing.
The fact that the UK PMI did so much better than the ISM version of the US PMI, encouraged the pound to rise against the dollar – it was a good days’ worth of trading for sterling. At the time of writing, there are 1.3281 dollars to the pound against a 1.3142 exchange rate 24 hours earlier. There are 1.1859 euros to the pound against 1.1785 this time yesterday. In both cases, the pound is significantly up on the Brexit low – at one point there were less than 1.29 dollars to the pound, while a few weeks ago, the euro pound exchange went close to 1.15. Bear in mind, however, that before the referendum, the pound was much higher – around 1.28 euros to the pound and 1.49 dollars.
So why did the UK see such a strong rise in August? Markit highlighted rising sales to the US, Asia, Middle East, Europe and Scandinavia (not that Scandinavia isn’t in Europe) supported by the falls in sterling.
But Samuel Tombs, at Pantheon Economics suggested that the August jump was something of a one-off, caused by manufacturers building up inventories. He also suggested that the figures may have been distorted by a statistical miscalculation.
He said: “Output grew at a faster rate than demand, leading the largest majority of manufacturers since June 1995 to report an increase in stocks of finished goods. Manufacturers likely won’t keep adding to inventories at this breakneck pace, particularly in the current environment of greater than usual uncertainty about the economic outlook.”
He continued: “The sharp improvement in the PMI in August also seems partly to reflect overly zealous seasonal adjustment. Note that the next largest increase in the output balance this decade—after the rise recorded last month—was in August 2013, when it rocketed by 6.6 points. The balance also jumped in August 2012.
“As production falls at many plants over the August lull, the unadjusted output balance always declines between July and August, because the balance is comprised of the number of manufacturers reporting whether output is higher or lower than in the previous month. Markit therefore revises up August’s reading to account for this predictable weakness. The seasonal adjustment factor, however, has become bigger in recent Augusts. Indeed, this year was the third largest in the last 24 years. We see no good reason why the seasonal lull in production should have become more pronounced in recent years.
“Accordingly, we think the manufacturing PMI likely will weaken sharply in September, and we continue to expect manufacturing output to contract in Q3.”