Industrial production followed a poor start to 2017 with another unexpected contraction in February. A 0.7 percent monthly decline was biased worse by the more volatile subsectors but still made for the first back-to-back drop in output since September/October last year. Annual growth slid from 3.3 percent to 2.8 percent, a 3-month low.
The key manufacturing sector held up rather better but even here output slipped a further 0.1 percent on the month. Weakness was most apparent in pharmaceuticals, which fell 4.4 percent (and have been particularly erratic of late) as well as chemicals (minus 2.1 percent) and wood, paper and printing (minus 1.6 percent). Decreases here masked decent gains in electrical equipment (3.0 percent) and textiles (3.0 percent).
Elsewhere within total industrial production, mining and quarrying dropped 2.0 percent on the month, water supply was down 0.4 percent and electricity and gas off 3.4 percent.
February's rather disappointing results should not prevent goods production from providing a useful boost to first quarter real GDP growth. Overall industrial production still shows a respectable 1.6 percent rise over the latest three months (manufacturing 2.1 percent) and if the sector PMI is to be believed, March was moderately good. Moreover, the CBI's Trends survey, which correctly called a poor February, signalled a decent rebound at quarter-end. Nonetheless, today's report may help to temper creeping speculation about a possible BoE rate hike over the next couple of quarters.
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.