UK manufacturing PMI hits highest level in over two years

December's figure of 54.1 was up sharply from 51.8 in November, with the average reading for Q4 2009 as a whole the highest since the final quarter of 2007. The headline PMI provides a single figure indication of operating conditions in the manufacturing sector. The index is calculated using data collected on new orders, production, employment, supplier performance and stocks of purchases. Manufacturing production increased for the seventh consecutive month and at the fastest pace since November 2007. Output rose at consumer and intermediate goods producers, but fell in the investment goods sector. Supporting the latest increase in total output was a further gain in incoming new business. New orders rose at the strongest pace for 29 months, with manufacturers linking higher levels of new work to market conditions starting to improve and clients moving to rebuild stocks. Improvement was mainly due to domestic demand, as growth of new export orders was only slight. UK manufacturing employment fell for the twentieth consecutive month in December, reflecting ongoing cost saving and redundancy programmes. However, the rate of reduction was the weakest since May 2008. Job losses were mainly seen at large firms, with SMEs reporting a slight increase in staffing levels. Price indicators moved higher in December. Average purchasing costs increased at the steepest pace for 15 months, reflecting higher commodity prices. Part of the increase was attributed to supply-side factors – including low stocks at vendors – as highlighted by a further deterioration in average supplier performance. Meanwhile, output prices rose for the second month in a row, although competition between manufacturers meant that the rate of increase remained only modest. December data pointed to a marked rise in purchasing activity. The rate of growth in input buying volumes accelerated to hit a twenty-five month high. However, the latest increase was insufficient to prevent a further drop in holdings of raw materials. Stocks of finished goods also fell in December. Backlogs of work declined again during the latest survey period, indicating that spare capacity remained available at manufacturers.