UK construction activity slowed significantly and by more than expected in January. At 52.2, the sector PMI was a full 2 points short of its unrevised year-end reading and at its lowest level since the recovery began in September 2016.
The cooling in activity was broad-based with all three subsectors (residential, commercial and civil engineering) signalling softer activity rates compared with December. Housebuilding was again the best performer but growth here was also the slowest in five months. The main negative was new orders which saw their smallest increase since October 2016.
However, it was far from universally bad news. In particular, sector confidence remained quite elevated and sentiment towards the coming twelve months actually rose to its highest mark since December 2015. This was reflected in the sharpest rise in headcount in eight months and the steepest gain in sub-contractor usage since December 2015. Moreover, pressure on capacity continued to build with lead times from vendors lengthening by more than in any month since June 2015.
Meantime, costs rose at the quickest pace in more than eight years as sterling's 2016 drop provided another sizeable boost to import prices.
In sum, the report is probably a little more bullish than the headline index might imply. Construction continues to expand and the industry is reasonably optimistic about the outlook. As with most other sectors of the economy, the real risk remains spiralling costs.
The Construction Purchasing Managers' Index (PMI) provides an estimate of business activity in the UK construction sector for the preceding month based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 170 construction companies. The panel is stratified geographically and by Standard Industrial Classification (SIC) group, based on the regional and industry contribution to gross domestic product. 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 data are compiled by the Chartered Institute of Purchasing and Supply (CIPS) and Markit.
The survey is based on techniques successfully developed in the USA over the last 60 years by the National Association of Purchasing Management. It is designed to provide one of the earliest indicators of significant change in the economy. The data collected are not opinion on what might happen in the future, but hard facts on what is actually happening at 'grass roots' level in the economy. As such the information generated on economic trends pre-dates official government statistics by many months.