UK Manufacturing Output Preview: Stagnant hard data set to beat optimistic surveys

The UK industrial production is expected to remain at the unchanged level over the month in October while manufacturing output is expected to decelerate to 0.1% m/m from 0.7% m/m in September, the Office for National Statistics (ONS) is set to report on Friday, December 8th.

The UK manufacturing output contracted during the most of 2017 with exception of July to September period when activity in manufacturing rose by 0.5% m/m, 0.4% m/m and 0.7% m/m respectively. Having fallen five out of nine months in 2017, the manufacturing output in the UK broadly corresponds with a general economic weakness of the UK economy a year and a half after the fatal Brexit referendum.

Forward-looking purchasing managers surveys (PMI) in manufacturing saw a solid expansion in manufacturing since the beginning of 2017, but the hard data collected from ONS rarely correspond to the overall positive tone of IHS/Markit’s PMI survey.

The manufacturing PMI for the UK picked up to 56.3 in October, up from 56.0 in September, indicating a solid rate of expansion while being above reading of 50. Even more optimistic data came n from PMI in manufacturing in November when the manufacturing activity jumped to the highest reading in last 51 months of 58.2

While October PMI data looked optimistic and the author of the PMI report Rob Dobson said that the UK manufacturing made “an impressive start to the final quarter of 2017 as increased inflows of new work encouraged firms to ramp up production”, even more, optimism was expressed in November’s PMI report.

“UK manufacturing shifted up a gear in November, with a growth of output, new orders, and employment all gathering pace. On its current course, manufacturing production is rising at a quarterly rate approaching 2%, providing a real boost to the pace of broader economic expansion” Rob Dobson, a senior economist at IHS/Markit wrote.
 
UK manufacturing PMI, 2008-2017

Source: IHS/Markit

So what makes the difference in ONS and survey data?

The dataset produced by the ONS and surveys like the one from IHS/Markit often differ very much, with statistical weakness on the side of surveys.

While the ONS data record exactly how much companies produce each month, the business surveys only capture whether a company’s output was higher, lower or about the same as the previous month.

The difference then stems from the height and the depth of the rises and falls in production, the business surveys measure how the rises and falls are perceived by surveyed managers in respective companies.

The second difference stems on the width of the sample. While IHS/Markit surveys about 650 companies in the UK, the ONS data are based on reports from 6,000 companies. The correlation of the hard data collected by the ONS and the faster, but less wide-spread surveys is therefore not warranted.

While the ONS data provide the most accurate assessment of manufacturing production performance, the business surveys like the one from IHS/Markit complement the picture with answers to questions about prices, employment or future business prospects.
 
UK manufacturing output, 2007-2017

Source: ONS