UK manufacturing would appear to have ended last year in surprisingly good shape. At 56.1, the sector PMI climbed a sizeable 2.5 points versus an upwardly revised November mark to secure its highest level in thirty months.
Output growth was particularly robust, boosted by a solid and broad-based rise in new orders that reflected healthy gains in both the domestic and overseas markets. Sterling weakness was again cited as a factor promoting foreign demand which saw its second largest advance since early 2014. Backlogs were also up and that despite the fastest pace of job creation in fourteen months.
However, inflationary pressures remained significant and inflation rates for both input costs and factory gate prices were again amongst the strongest seen in the survey's history.
The December PMI report is consistent with quarterly growth of manufacturing output around the 1.5 percent mark. October was a disappointingly weak month for goods production but both the PMI and CBI surveys suggest that November and December should more than compensate for this. Once again it seems that any significant negative effects from the Brexit vote have yet to materialise. That said, business surveys continue to indicate a high degree of caution about 2017 so there could yet be some nasty surprises just around the corner.
The Manufacturing Purchasing Managers' Index (PMI) provides an estimate of manufacturing business activity for the preceding month by using information obtained from a representative sector survey incorporating around 3,000 companies. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The survey covers more than 600 industrial companies and is compiled by the Chartered Institute of Purchasing and Supply (CIPS) and Markit.
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.