Bank of England’s Agents’ Summary of Business Conditions, Q3-2021: At its meeting this week, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted unanimously to keep the Bank Rate at 0.1% and by 7-to-2 to maintain the current level of assets purchases. This comes despite their forecast that inflation will rise to more than +4% in the 4th quarter of 2021 (mainly because of the rise in gas prices and other goods prices) and could remain there into the first half of 2022. However, they still expect this increase in inflation to be transitory and this probably lies behind the decision to keep interest rates on hold.
Alongside the minutes of the MPC meeting and various other papers - including an exchange of letters between the Governor of the Bank and the Chancellor of the Exchequer (because inflation is outside of the MPC target range of 2% ±1%) - the Bank has also released its Agents report for the current quarter. For the manufacturing sector, they note that demand remains strong but that output growth slowed due to shortages of materials, components and labour, although these varied by industry.
With global demand high, issues with supply chains, transportation and labour shortages have stretched lead times for many contacts, especially in the automotive industry. There is also a rise in demand for components used in the repair of motor vehicles, trains and ships while some contacts in the construction industry mentioned that shortages of materials and long lead times were being exacerbated by some companies stockpiling materials.
Supply chain issues were also reported to have constrained export growth and while there were some reports of EU customers moving away from UK suppliers following Brexit there was only limited evidence of UK producers substituting away from EU imports.
The agents noted that most of the sectors had spare capacity, although there were a variety of constraints across the economy. As we have already noted, the contacts in manufacturing (and construction) reported that in addition to staff shortages, output was being constrained by shortages of raw materials, components and finished goods, partly due to shipping delays and a surge of Covid cases in other countries.
Investment intentions remain positive with both new work coming on stream and paused projects being reinstated. For manufacturing, contacts reported investing in automation, upgrading machinery and in research and development - in some cases, this was to address shortages of skills and labour, although some contacts said that labour and materials shortages and the associated cost increases had caused delays and revisions to investment projects.
You can get the full details of the BoE’s Agents report from their web-site at https://www.bankofengland.co.uk/agents-summary/2021/2021-q3 and the Monetary Policy Statement is at https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021....
Flash Purchasing Managers Index, September 2021: The flash Purchasing Managers Index (PMI) for manufacturing generally showed a slowdown in the pace of expansion in activity; for the UK, the latest reading is 56.3 which is the lowest level for seven months and follows the reading of 60.3 in August. While material shortages led to a lower level of growth for output (also at a 7 month low), the survey also reports a softening of demand with the new orders element also lower but despite this, order backlogs are still growing. There was also another significant lengthening in suppliers’ delivery times which adds an upward distortion to the PMI calculations.
Before we go on to look at the Euro-zone it is worth noting that any PMI reading above 50 shows an expansion in activity (below 50 is contraction). Therefore, although the PMI readings are generally lower than in August, they still point to manufacturing activity overall and the individual elements improving compared to the previous month. There is no measure of levels in the PMI data, only a direction of trend compared to the previous month with the strength of this trend being indicated by how far the reading is from 50.
The results for the Euro-zone are similar to those for the UK with the overall manufacturing PMI falling from 61.4 in August to a 7-month low of 58.7 for September. Part of this was the reading for the output falling to its lowest level for 8 months, although at 55.6, this is still a significant expansion - this was again driven by supply chain constraints. There was also a slowdown in the rate of growth for orders which was put down to the effects of the pandemic, while the distortion to the overall manufacturing PMI from lengthening delivery times remains a factor for the Euro-zone.
The overall manufacturing PMI for the USA has fallen by less than either the UK or the Euro-zone and has a higher reading but, at 60.5, it is still at a 5 month low. It may be a timing issue compared to the other countries, but the US PMI reading was supported by an improvement in the orders element so while the output component was at an 11 month low because of the same issues as we have already seen of supply constrains and materials shortages, orders saw a robust increase.
In one sense the trend in Japan is similar in that the overall manufacturing PMI has slipped from its August reading of 52.7 to 51.2 for September but for this country, both the output and orders elements fell below 50. The overall index was boosted by an increase in employment (which tends to lag the general cycle) and by the lengthening of suppliers’ delivery times which is a global issue at the moment.
The flash PMI can be downloaded from the IHS Markit web-site at http://www.markiteconomics.com/Survey/Page.mvc/PressReleases; the final figures for June will be published next week and we will bring these to you next Friday.
CBI Industrial Trends Survey, August 2021: The results of the September* edition of the CBI Industrial Trends Survey (ITS) showed total order books improving to their highest level on record (the time series goes back to 1977). Within the total, export order books also improved reaching their highest balance since March 2019 - this implies an even stronger increase in home orders to drive the total to its record level.
In contrast, and an indication of the supply chain issues being faced by manufacturers in some sectors, the pace of growth in output eased in the latest 3 months, although it remains well above the long-run average for this measure. There was growth in 11 of the 17 sub-sectors covered by the ITS but the main driver of the overall positive figure was the production of food & drink - this reflects the re-opening of the hospitality sector over this period*. The respondents to the survey expect higher pace of growth in the coming 3 months*.
In a further indication of the supply chain problems, although the measure of the adequacy of stocks improved from the record low in the previous survey, it remains weak by historical standards.
* Although this is billed as the September results, the data collection period means that it really reflects figures for August or the three months either ending in or after August
You can get the Press Release of the CBI ITS from their web-site at www.cbi.org.uk/media-centre (21 September) or request it from MTA.
USMTO and CTMR, July 2021: The US Manufacturing Technology Orders (USMTO) programme tracks orders in the US market, based on the reports from participants. For the first 7 months of 2021 (January to July), orders were +48.1% higher than in the same months of 2020. While this is not unexpected given the impact of the Covid outbreak, it is more than this as at the current run rate, orders would reach the 2nd or 3rd highest annual total in the history of this survey.
The AMT Press Release also highlights the wide spread nature of this growth; it is not being driven by any particular industry with July seeing an increase in orders from industries as diverse as motor vehicle stamping, food processing equipment and agricultural machinery manufacturers.
There are some differences in the regional pattern with growth over the first 7 months of the year ranging from “only” +11% in the South-East up to +101% in the North Central-West region. In between this, the other 4 regions saw growth between +34% (West) and +56% (South-Central).
The US Cutting Tool Market Report (CTMR) tracks orders for tooling on a similar basis. Growth here is more muted with an increase of +4.6% being recorded for the year-to-date figures for the first seven months of the year. Given the more direct relationship between customer output and tooling demand, issues in some industries (especially automotive) around the supply chain disruptions have created more of a roller-coaster ride for the tooling market.
You can download the press releases for the two surveys from the AMT web-site at www.amtonline.org, with the CTMR release also published on the USCTI web-site at www.uscti.com; alternatively, you can request either or both releases from MTA and we can make sure you get them when they are published each month.