Don’t get too excited about the recent upswing in manufacturing data

Kaveh Pourvand, 4 September 2013

UK manufacturing is ‘booming again’. The FT have announced that the ‘March of the Makers’ have gotten ‘into their stride’. The reason for this excitement is that the PMI indicator (the Purchasing Managers’ Index) for August has hit a two-and-a-half year high of 57.2. This is above the crucial 50 mark which distinguishes expansion in the month from contraction.  This represents the fastest increase in manufacturing output since 1994. This follows the ONS second estimate of GDP for the quarter showing that manufacturing has contributed more to growth than they had initially estimated.

This all sounds like excellent news. So why the suggestion to cap the excitement?

Reporting of economic trends is characterised by hyperactive short-termism in our contemporary age of 24-hour, ubiquitous media. Witness how the quarterly release of GDP figures, which are always initial estimates subject to revision, are treated by the media as ‘make-or-break’ moments in George Osborne’s chancellorship. He seems to go from disaster after one set of results to triumph after another. This is not a particularly helpful way to analyse the economy. Economic prosperity (or stagnation for that matter) is something that is determined over the long-term.

The fear is that we are seeing a similar process here with the reporting of the manufacturing data. For all the talk of a ‘boom’, further analysis paints a less triumphant picture. For starters, despite the record growth in output, we are still at a low base. The FT points out that factories still produce a tenth less than they did at the height of the economic boom pre-2008.  Secondly, this increase is attributed to better economic performance in the Eurozone, something which could quite easily reverse. Thirdly, peaks and troughs come and go. Without substantial structural change – things like reforming the finance sector by creating new institutions, adopting an exchange rate target or improving supply chains – it is hard to see how gains in manufacturing can be maintained.

That is why we shouldn’t get too excited.