The manufacturing PMI improved slightly in June, although it was consistent with falling activity for a second month running (see chart). The headline index rose by 2.7 points to 48.6 (consensus: 46.5, Barclays: 47.0). The output index rose to 51.7 (from 47.6) and suggests rising manufacturing output again following a fall during the previous month. Firms attributed the increase in output to the clearing of backlogs of work as well as new product lines.
Although the new orders measures improved, they continued to suggest both domestic and foreign orders contracted in June. The overall new orders index rose to 47.0 (from 42.0). Overall new orders fell for a third month running mainly as clients were reluctant to commit to new expenditure, although some companies linked the weakness in new orders to the unseasonably bad weather as well as disruptions caused by the additional bank holidays in June. The new export orders measure rose to 47.8 (from 46.6), but remained below the 50 point mark for a third month running with the euro area crisis cited as the main source of the weakness, although the economic slowdown in the US and Asia was also important.
As activity indicators remained weak, some relief came from easing input price pressures. The input price index reported the sharpest fall since November 2008 dropping by 11.3 points to 40.3 (see chart). The output price index on the other hand reported only a marginal fall to 51.7 (from 51.8) and remains consistent with rising output prices. Over the past couple of years, the sharp increases in input prices and diminished pricing power as a result of weak demand have squeezed companies’ profit margins. As a result, the fact that firms are not passing on the fall in input costs to factory gate prices is not surprising, in our view, as they attempt to rebuild their profit margins again.
Although the manufacturing index improved slightly in June, it still suggests falling activity in the sector for a second month running. We now have manufacturing PMI data for the whole of Q2 and they are consistent with our forecast that output fell during the last quarter as a result of the disruptions from the additional bank holiday and also because of underlying weakness in demand both domestically and from abroad. However, as we expected the extent of the weakness reflected in the survey measure is less pronounced than our forecast for a 1.4% q/q in manufacturing output, as the former is generally less sensitive to these types of disruptions.
Barclays Capital