What should we make of today's PMI data?

UK manufacturing output and orders snapped back in August, according to this morning’s Markit/CIPS purchasing managers’ index. In fact the 5 point jump in the reading from 48.2 to 53.3 was the joint highest ever recorded. This is unequivocally good news for the manufacturing sector after the plunge following the referendum on Britain’s membership of the European Union. The main factor cited by respondents for their optimism was the slump in the value of the pound—which surged by almost 1 per cent after the release—helping to boost business abroad. But to be fair, it looks as though the home market was more upbeat too.

It would have been shocking if the August PMI hadn’t bounced back bearing in mind that the prior one gathered opinions from respondents in the wake of the mind-freeze after the referendum. So, in addition to the fall in Sterling, we can also attribute the bounce to some post-referendum “catching-up” because—and it needs saying—we haven’t actually left the EU yet, and are unlikely to do so for a considerable time. Not to mention that when we do it will be on terms that no one has a clue about, least of all the government. Accordingly, while economic myopia or simple cheerleading will cause some to rejoice at the August manufacturing data, we should not get carried away after a one month surge in a business sentiment index, following a precipitous drop. Here are four important reasons why that is the case.

First, the better tone in UK manufacturing, according to the survey, is down largely to the fall in Sterling, but it may not fall so abruptly every month. In fact it won’t.

Second, it also echoes a bounce in the manufacturing PMIs in other countries, including China and even beleaguered Greece, as reported this morning. The global economy is hardly firing on all cylinders, but things are looking alright this summer, with activity rates stabilising or rising in the US, the euro Area, and across much of Asia.

Third, as long as we are in the EU and, specifically, an integral part of the Single Market and the EU’s network of global trade, companies will carry on as before. Their behaviour won’t change significantly until it becomes clear how and in what ways the external environment for the UK may change. Many people, including those who campaigned for “Remain,” made the mistake of conflating the short-term cyclical effects of the referendum vote, imagining that demand would dry up, with the more corrosive and glacial medium-term consequences of the economy losing its supply potential as a consequence of a “hard Brexit” or one resulting in less favourable trade, investment and labour supply arrangements. Unless the government manages to structure a post-EU deal that protects these growth drivers, or mitigates the negatives, the economy must, as a consequence, suffer.

Fourth, to be comfortable that the economy is stable again in the wake of the referendum, we must await also the services PMI next Monday, 5th September, since we are first and foremost a services-dominated economy. Manufacturing is less than 10 per cent of the economy, although a key driver of services activities. The services PMI slumped in July too to 47, from a pre-referendum reading of 52.3. It should have recovered in August as well, but it won’t have done so because of the pound. How far it bounces and what respondents say about service sector business conditions will be worth noting.