The goods producing sector started 2015 on a surprisingly soft note. Total production dipped 0.1 percent on the month while manufacturing output fell a steeper 0.5 percent, its first drop since October. Positive base effects ensured that annual growth of the former still accelerated from 0.8 percent in December to 1.3 percent but the latter's yearly rate slipped from 2.6 percent to 1.9 percent, its slowest pace since December 2013.
Output showed monthly reversals in eight of the thirteen manufacturing sub-industries led by computer, electronic and optical products (9.5 percent) which effectively alone accounted for the overall decline. The largest gain was in basic metals and metals products which rose 4.2 percent.
Although electricity, steam, gas and air conditioning contracted 0.4 percent, total industrial production benefited from monthly increases in utilities (0.4 percent) and, in particular, oil and gas extraction (2.4 percent) and mining and quarrying (2.0 percent).
Today's data mean that industrial production has now fallen in three of the last four months, albeit by only small amounts. Manufacturing has held up rather better but growth here over the last three months is still a relatively modest 0.4 percent. Such figures contrast with decidedly more upbeat CBI and PMI surveys which suggest that there may be some scope for upward revisions over coming months. Certainly both surveys were bullish about developments February.
Nonetheless, as they stand the January data may take the edge off more upbeat first quarter GDP forecasts. In any case, with the pound so strong in Europe, they should leave most BoE MPC members all the more cautious about raising Bank Rate too soon.
Industrial production measures the physical output of the mining and quarrying, manufacturing, gas and electric, and water supply and sewerage sectors.
Industrial and manufacturing outputs are watched carefully by market participants despite the decline in the importance of manufacturing in the UK economy. Manufacturing output is the preferred number rather than industrial production which can be unduly influenced by electrical generation and weather. The manufacturing index is widely used as a short-term economic indicator in its own right by both the Bank of England and the UK government. Market analysts also focus on manufacturing and its sub-sectors to get insight on industry performance.
Industrial production accounts for less than 16 percent of the economy within which the key manufacturing sector is worth about ten percentage points. Total manufacturing is divided into thirteen sub-sectors, ranging from food, drink and tobacco through chemicals and chemical products to electronics and transport equipment. Consequently, this report has a big influence on market behavior. In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not.
Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more subdued growth that won't lead to inflationary pressures. By tracking economic data such as industrial production, investors will know what the economic backdrop is for these markets and their portfolios.