August 4, 2008 | posted by Michael Baxter in UK economy, manufacturing |

Every month the Chartered Institute of Purchasing and Supply releases its report on manufacturing. Every month for several years we have reported on its findings, diligently, but usually putting the story in our third or fourth slot. For 45 months nothing much happened. For 45 months the CIPS Purchasing Managers Index was 50 or slightly higher, suggesting the sector expanded in the month, Now, though, it’s different. All of a sudden the CIPS PMI index is falling like a rock down a cliff.

For July the PMI index stood at just 44.3, down from June’s score of 45.8, and May’s 49.8.

For three months now the PMI index has been below the critical 50 mark.

But that’s just the start of it.

The New Business Index, a pointer to the months ahead, fell too, this time to 40.5. According to CIPS and Markit who jointly produce the report, this was the fastest rate fall in nine-and-a-half years.

Why the fall? Companies cited weaker demand from domestic clients. There were also reports that the downturn in the housing market, the high cost of credit and competition from lower-cost foreign producers impacted on new order volumes. Levels of new business received from abroad also contracted during July.

But, while orders fall, the costs of raw materials rise. This time the input prices index rose to 82.4, yet another series high. To put that in perspective, the index is now almost 20 points up on a year ago, yet even then, it was considered too high.

The output index, that’s the index which tracks what manufacturers charge their customers rose too. In July this index stood at 63.1, also a record. But while manufacturers are upping their prices at a record pace, the rate at which their raw materials are growing in cost is rising even faster, so they are still swallowing a large part of the extra costs.

Rob Dobson, Senior Economist at Markit Economics, said: “A corrosive mix of falling demand and record cost inflation penetrated almost all areas of the UK manufacturing sector in July. Recent months have seen output and new orders fall at their fastest rates for around nine-and-a-half years, leading to sharp cutbacks in employee numbers, as manufacturers struggle to obtain new contracts in the face of deteriorating economic conditions at home and abroad, ongoing housing market turmoil and a weak consumer market. However, with inflation of input costs and output prices climbing further to set new record highs, the MPC will be loathe to risk anchoring inflation expectations at above target levels through a near-term cut in rates.”

The worrying thing though is this. Manufacturing is supposed to be one of those areas that is doing well at the moment. With the lower pound, we are supposed to be exporting our way out of trouble. Clearly the consumer sector is struggling, clearly the High Street is in crisis, clearly construction in the housing sector is virtually grinding to a halt, but manufacturing is supposed to be keeping its end up.

The next few days will see CIPS reports on construction and services. On this occasion they will be more important than normal, as they tell us how widespread the slowdown is. This time last month, both reports showed a sharp slowdown.

Those who keep saying the crisis of 2008 is whooped up by the media, should pause and consider these CIPS reports.

This is not a crisis made, that exists only in the imagination of the media. Which is why comments that the economy is growing too fast and the brakes need to be applied, which some members of the Bank of England Monetary Policy Committee hold to, is dangerous.

That prices are rising at the moment is obvious. But as job losses mount, and the credit crunch means there is less and less money floating around, expect rising prices to turn to falling prices fast.