The UK's industrial sector had a surprisingly poor October. Overall production declined fully 1.3 percent on the month, its worst performance since September 2012. Annual growth of output dropped from 0.4 percent to minus 1.1 percent, its first negative print since December last year.
The key manufacturing sector was little better off with production here down 0.9 percent versus September and 0.4 percent lower than a year ago. In terms of monthly changes, weakness was most apparent in pharmaceuticals (minus 3.6 percent), textiles and leather (minus 4.0 percent), food and drink (minus 1.0 percent) and other manufacturing and repair (minus 1.3 percent). The only increase of any real note was in coke and petroleum (1.9 percent).
Total industrial production was further hit by an 8.6 percent nosedive in mining and quarrying, largely reflecting the closure of the N. Sea's Buzzard oil field. This was only partially offset by gains in electricity and gas (3.5 percent) and water supply (1.8 percent).
The disappointingly soft data leave industrial production in the three months to October down 0.9 percent versus the previous period and manufacturing output 0.3 percent lower. These figures look especially weak in the context of the recent buoyancy of the PMI and CBI surveys so November/December could well see a decent rebound. Still, today's report will probably clip the pound's wings and increase the likelihood that BoE interest rates could be on hold for a long time yet.
Industrial production measures the physical output of the mining and quarrying, manufacturing, gas and electric, and water supply and sewerage sectors. Manufacturing is seen as the best guide to underlying developments as the other subsectors can be highly volatile on a short-term basis. Estimates are largely based on a monthly business survey of roughly 6,000 companies.
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.
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