German manufacturing had a slightly better month than originally thought in October with the flash PMI being revised up 0.5 points to 52.1. However, the new reading was still 0.4 points short of the final September outturn and only indicative of a moderately respectable rate of business expansion.
Output rose again but at its slowest pace in three months as investment goods and intermediates decelerated and more than offset a healthy gain in consumer goods. That said, new orders stretched their growth sequence to eleven months and with October's rise much in line with September, were again comfortably above the long-run average. At the same time, backlogs were accumulated for a ninth month running. Buoyancy here will have contributed towards another increase in manufacturing payrolls and while only small, this probably had more to do with skills shortages than weakness in demand.
October saw another substantial drop in input costs, mainly on the back of falling energy prices. Factory gate charges were also trimmed.
Taken at face value, the October PMI points to the slowest rate of manufacturing growth in three months. On the positive side, new orders are still rising at a reasonable rate and output should be further boosted by the ongoing increase in backlogs. However, stocks of finished goods are starting to rise and if recent surveys are anything to go by, consumer demand will cool this quarter. With inflation still very weak, the overall picture is not one that should leave the ECB particularly happy.
Purchasing Managers' Manufacturing Index (PMIs) is based on monthly questionnaire surveys of selected companies which provide an advance indication of what is really happening in the private sector economy by tracking changes in variables such as output, new orders, stock levels, employment and prices across the manufacturing sectors.
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index in the U.S. and the Markit PMIs elsewhere, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The Markit PMI manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. And its sub-indexes provide a picture of orders, output, employment and prices.
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