Purchasing Managers Index - CIPS

The headline index stayed at 61.5, equalling the all-time high set last month.

The index tracking employment hit a new all-time high for the series, and the index tracking new export orders hit the third highest reading in the series’ history.

Alas, the index tracking output prices was at the second highest level in the series’ history, but let’s not dwell on the bad news. We are, after all, living an economist’s good dream.

Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS manufacturing PMI said: “The UK manufacturing sector maintained its strong start to the year in February. The PMI held steady at a series record high, while growth of output, new orders and exports were all among the fastest since the survey began. A jobless recovery would be a weak recovery, so it is positive to see jobs growth hit a fresh record high.”

But then again, all dreams end, and Mr Dobson heralded the end of the dream when he said: “However, the strong performance of the sector, which makes up 13% of UK GDP compared to 52% for non-government services, can only partly offset the weaker parts of the economy such as services and construction.”

David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply was even more keen to see the economic fantasy halt when he said: “The fly in the ointment remains macro-level inflation which is likely to go from bad to worse due to the unrest in Libya and escalating oil prices. Purchasing managers reported raw materials costs were continuing to rise at historically high level during February, leading many to pass on higher purchasing costs to their clients.

“Textiles & Clothing and Chemicals & Plastics felt the most severe impact of higher input costs during February; and one of the challenges for the forthcoming Budget will be finding ways of supporting these relatively high performing industries through a period of uncertainty.”

He concluded: “So, in all, good news is out there for some but there’s still a difficult
path for others.”

Article by Michael Baxter, email michaelbaxter@investmentandbusinessnews.co.uk

The US Trade Department reacted by saying that the report would actually confirm that “European subsidies to Airbus dwarf any subsidies that the United States provided to Boeing”. This statement refers to an earlier 2010 ruling which Boeing accused Airbus of receiving $20bn in illegal subsidies.

The Yanks may have a point because if you average out $5bn over the last few decades this only comes to the price of one large body aircraft per year. This is hardy enough money to do any serious research and development.

This latest WTO dispute is the largest in its history. The arguments go back 6 years and have their foundation in an old 1992 trade agreement that was abandoned by the US Government. There is everything to fight for as the aircraft market is worth $1.7 trillion. In recent years the fight has become tougher as new Chinese and Brazilian aircraft have started to compete in this market.

There is also a wider impact of this dispute. The WTO will release its official findings in a few weeks, around the same time as the US Air Force are going to decide on who will win the $25-50bn contract for refuelling tanker planes. Both Airbus and Boeing have their political allies but the report may shine a negative light on just how Airbus have been able to undercut competitors in the US market. Image from Smarter air charter

Sales at all retailers fell 0.8 per cent in December on the month before, and annual growth was a big fat nothing – or zero.

Poor sales of fuel helped to distort the picture. It is not hard to see why. After all, when the snow came down, people drove less. But even if you stripped put the effect of auto sales including fuel, sales were still down 0.3 per cent on the month before.

Clothing was another big casualty, with sales down 2 per cent.

Chris Williamson, Director and Chief Economist at Markit said: “December proved to be a disastrous trading month for retailers, as many had anticipated, with a record drop in sales for the crucial Christmas shopping period.” He added: “While snow undoubtedly contributed to the disappointing performance in December, we believe that demand is weakening and therefore expect consumer spending to remain under pressure in coming months due to the combination of this month’s VAT rise, falling real incomes, high unemployment and widespread job insecurity. This adds to the risk that economic growth will slow further in the first quarter of 2011 from the already modest 0.4% quarterly rate of increase we have pencilled in for the final quarter of last year.”

Vicky Redwood, Senior UK Economist at Capital Economics said: “The outlook for spending this year remains pretty bleak. Note that the Bank of England’s latest Trends in Lending Report revealed a fall in mortgage approvals from 45,000 to 40,000 in December. Although the snow may again have been partly to blame, the housing market is clearly weakening – adding to the numerous other pressures building on consumers.”

A spokesmen at Investment and Business News said: “Oh dear.”

The latest data from the ONS on the UK labour market from September to November had total employment falling by 69,000 to 29.089 million. Unemployment rose by 49,000, hitting 2.498 million.

The claimant count, however, that’s a measure of unemployment by taking those who are on jobseeker allowances, has fallen for three months in a row.

Perhaps of more interest, in terms of showing what the underlying trends are, is the interaction between public and private jobs.

Alas, ONS data covering these measures only goes up to September. But since this data wasn’t available the last time we reported on the jobs market, it is worth taking a look.

Between June and September, the public sector lost 33,000 jobs; the private sector was flat, and neither put on nor lost jobs.

During the 12 months to September, the public sector lost 77,000 jobs; the private sector put on an impressive 296,000 jobs.

The first half of last year was good, very good for private sector job creation. Unfortunately, the latest data seems to suggest this is no longer the case.

And finally, there is average wages.

Average earnings growth including bonuses in the year to November was 2.1 per cent, the same as the annual growth the month before. Growth in average earnings excluding bonuses was also unchanged in November with 2.3 per cent growth. Just bear in mind that inflation according to the retail price index for the same period was 4.7 per cent, meaning most of us are getting a lot worse off.

Pay growth (including bonuses) in the private sector stood at 1.9 per cent in the year to November and 2.4 per cent in the public sector.

In other words, if it wasn’t for the public sector, wages would be rising at an even slower pace, and we all know public sector wages are not going to rise so fast this year.

At the moment there isn’t even a hint of inflationary pressure coming from wages – which is why rates of interest should stay at their current level for the time being, and until we see a change in the labour market and remuneration.

Well, for once there are reasons for cheer, because here are some interesting theories to suggest that the UK could actually do rather well out of it all.

But first, let’s look at the one USP we are told the UK already possesses: the City of London. If the forecasts about how the global economy will grow over the next few decades are anywhere near right, then the global finance industry is set to boom. And if the City can remain one of the world’s most important financial hubs, then during the first half of this century this sector could bring in trillions to the UK economy. And this of course is the argument to support massive bankers’ bonuses: for the City to fulfil its potential it must attract the top people, and that means big pay packages.

But there are three problems with this. Firstly, if the City grows with the global economy, and then we face another banking crisis, the cost of a bailout may be too high for the UK government. Secondly, a booming City may push up the value of the pound, making it harder for other sectors to compete. (This is known as the Dutch disease, after North Sea oil exports once pushed up the price of the guilder, and as a result other Dutch exporters lost competitiveness.) The other problem relates to the whole issue of the fairness of bankers’ pay. The City may or may not prove to be an incredibly valuable asset for the UK, but if in making it a success we agree a kind of devil’s pact and sell the soul of the UK, then that maybe is a price that is just too high.

But actually, even if bankers’ bonuses are curbed, there is good reason to think that the City will still remain popular as a financial hub.

Steven Johnson explained it in his book Emergence, how cities can act like glue, see http://www.investmentandbusinessnews.co.uk/banking/sarkozy-says-to-banks-come-to-france-and-leave-that-dirty-city-of-london-behind/ for our explanation of Johnson’s idea. The City offers networking advantages to bankers that are just not going to disappear overnight. The latest thinking in networking theory suggests that each network is dominated by handful of hubs, and hubs tend to grow over time. Within the financial services industry, the City is one huge hub – and it is highly unlikely its growth will reverse.

Indeed, so great are the networking benefits provided by the City, that the UK exchequer could probably justify some kind of City tax.

But let’s put the City aside, what about the UK in general?

Will Hutton covered how countries such as the UK can compete in the globalised world in his new book, ‘Them and Us’. He said: “Firms are already increasing investment in their software, organisational development, non-scientific R&D, design, architecture, reputation and capacity to provide ongoing after-sale service. British investment in these ’intangibles’ now comfortably exceeds investment in the ‘tangibles’ of factories and machines, partly because it has risen at three times the latter rate for a generation. Firms have to be clever in what they do, how they do it, and how they present themselves to their markets. These injunctions already hold true in almost every area. At one level, the knowledge economy is laser surgery, personalised learning, and drought-resistant crops; at another it is EasyJet and Ryanair, GPS navigation systems and music downloads; at another it is Prêt, Jamie Oliver and Green and Black’s organic chocolate. It is cloud computing, which avoids the infrastructure capital costs of software applications by being accessed online by everyone as a utility. It is visiting the car factory to meet the team that customised your car. It is the immersive entertainment of Modern Warfare II and the iPlayer. Ian Brinkley director of the Work Foundation’s Knowledge Economy Programme, calculates that more than two-fifths of Britain’s workforce and value-added now comes from broadly defined knowledge-based industries and services of these types – double the levels of 1970 – and that the figure will consistently rise in the years ahead.”

So that’s the opportunity, how can the UK benefit?

Neal Gandhi, CEO at Quickstart Global and author of ‘Born Global: Successful Global Expansion From Those Who’ve Done It’, reckons he has managed to put his finger on what he sees as the UK’s unique assets.

First, there is the accident of geography, or GMT. The working day in Britain, and this is pretty unique, overlaps with the working day in both Japan and California. A massive benefit that people too easily forget.

Then there’s the popularity of the English language, well that’s a benefit that is pretty easy to understand. (Incidentally there is a theory we will eventually see the evolution of lots of versions of the English language as different countries incorporate their own unique cultural characteristics into the way they speak English. It is far from certain that the English language we speak in Britain will be the version of English that ultimately becomes the most widely spoken version.)

Then there’s the UK’s own cultural diversity. Mr Gandhi reckons that within London no less than 200 different languages are spoken. Within the popular media, immigration and the mix of different cultures in the UK is portrayed as a bad thing, but this diversity also gives the UK a pretty unprecedented understanding of other cultures, a potentially invaluable asset in a globalised world.

Then there’s design expertise. From the design of the iPhone, Formula One expertise (Red Bull, McLaren, Williams and Mercedes all base their Formula One outfits in the UK), and even companies such as ARM, the chip design company that is licensing its chip design for use in smartphones.

Another USP that Gandhi seems to think the UK possesses is what he calls stoicism – a kind of bloody mindedness. The UK just gets on with things. After the terrorist attacks of 2005, the Brits just carried on, unlike in the US where air travel plummeted after 9/11 – and bizarrely led to more deaths as a result as car travel is more dangerous than air travel. Maybe you can also describe this stoicism as a kind of spirit of the blitz-type mentality.

And so that’s the opportunities. Yes the world is getting more competitive. But then so are the opportunities to do business. And people who write off the UK, saying we are set to slide into economic ignominy, are being way too pessimistic.

The YouGov survey polled 2,00 people and found 6 per cent had used their credit card to pay their mortgage or rent at least once over the last six months.

Campbell Robb, Chief Executive at Shelter said: “This is a totally unsustainable situation and one which we fear could see thousands more families pushed into the spiral of debt, eviction or repossession and ultimately homelessness… It is vital that every person using credit cards in this way takes action to get out of debt and seeks urgent advice from organisations like Shelter to ensure they don’t lose their homes.”

He is quite correct, but actually the survey is really pointing towards a very unpleasant aspect of the economic recovery. The fact is, the UK may be growing again, but the fruits of this growth are not trickling down to households. Households are using credit cards to pay for mortgages because they are skint, and are holding with desperation to the view that things will improve if only they can hang on in there.

In 2011, things will get worse for households as inflation continues to exceed wage increases.

The implications for house prices are pretty negative, too. There will come a time when it is simply not possible to use one’s credit card to pay for a mortgage – and when this happens, rising repossessions will follow.

The UK is more precariously poised than is commonly understood. Companies are flush with money, which has led many to forecast rises in share prices this year, as dividends rise and merger and acquisition activity surges. But the mismatch between corporate strength and household weakness is not sustainable, and unless it is fixed, there will be another economic crisis down the line.

According to CIPS/Markit, manufacturing is booming, with the latest PMI hitting a 16-year high in December, and the index tracking employment in the sector hitting an all-time high.

Alas, services and construction did not look so good, and all in all, much of the positive effect on growth from manufacturing was cancelled out by the decline in construction and services – or so suggests CIPS/Markit.
Services and construction both slipped back into contraction in December, with activity levels declining for the first time since April 2009 and
February 2010 respectively.

Markit is now forecasting that quarterly GDP will slow further in the fourth quarter, down from 1.1 per cent in Q2, and 0.7 per cent in Q3, to around 0.4 per cent in Q4.

More to the point, Markit reckons the latest PMI reading suggests growth in December slowed to near stagnation.

Oh deary, deary. Markit said: “The UK appears to be on course for disappointing growth in early 2011, especially as any rebound from weather-related disruptions will occur alongside January’s increase in VAT.”

But what is all a little odd is that, according to the ONS, UK corporate profitability surged in the third quarter, hitting its highest level since Q1 2009. The net rate of return by private non-financial corporations in the third quarter of 2010 was 11.9 per cent. This compares with the revised estimate of 11.6 per cent in the previous quarter, and 11 per cent in Q1.
Net rate of return in 2009 was 12.3, 11.3, 10.8 and 10.9 per cent per quarter, respectively.

But actually, it is not odd at all. Rather, this is a symptom of a pattern we have been observing for some time. It appears at the moment that there is hardly any correlation at all between growth in corporate profits and growth in wages.

Companies are awash with cash, it seems. We are not talking about dynamic little entrepreneurial businesses, of course. They need cash and banks ain’t providing it. Rather, it is the big corporates. They are so awash with money they are not sure what to do with it. These are the very same companies that don’t want to borrow from banks, thus supporting the banks’ assertions they are willing to lend, but no one wants to borrow. It seems the only way your bank will lend you money at the moment is if you don’t want it.

So what will companies do with all their cash? Chances are they won’t save it; interest rates are way too low for that. If they try putting their hoardings in deposit accounts, shareholders will scream out in fury. So that means one of three things: a year of big dividends and share buybacks; a surge in investment; or a rise in merger and acquisition programmes.

At the tail end of last year, the FT’s Martin Wolf was about as bullish as one can recall, thanking central banks for their foresight in rescuing us all from financial disaster.

And this week, the latest purchasing managers indices (PMIs)have revealed a fine tale, with the UK PMI from CIPS/Markit hitting a new 16-month high; the index tracking employment only falling slightly from last month’s highest ever reading; and new export orders reaching their highest level since April when they hit an all-time high. In the US, the PMI has hit a six-month high, but bear in mind six months ago it was suggesting US manufacturing was booming.

And yet, data out at the tail end of 2010 revealed that while US annualised growth was 2.6 per cent in Q3, final demand (that’s demand after removing the effect of stock re-building) was up just 0.9 per cent. In other words, much of Uncle Sam’s stellar growth may have been down to the inventory cycle, and thus won’t continue.

And while it’s good to see manufacturing companies apparently taking on more staff, the Chartered Institute of Personnel and Development (CIPD) – who seem to be the experts on the UK job market – have forecast that public sector employment will fall by 120,000 and private sector employment will fall by 80,000, pushing UK unemployment up to 9 per cent.

One thing is for sure: while 2011 may be good for equities, for households it will be awful. It seems likely inflation will greatly outstrip wage rises. In fact, recent data suggests it won’t be until around 2015 before average households are as well off as they were in 2009.

So, if consumers are going to struggle, and the public sector is set to feel the axe, growth can only come from investment and exports.

Exports are looking promising, but the nagging doubt remains that US debt and euro woes will lead to sterling rising against the euro and the dollar. This could kill off hopes of an export recovery.

And if demand is so low, why should companies start investing? Surely you only invest if you think you can sell more products.

Maybe the problem is that wages have been cut by too much. Companies have cut costs, and for individual companies this makes sense, but for the macro economy this could mean demand will be insufficient for companies to generate the growth they require.

So we look towards the East, hoping demand will come from China and India. But here there is promise, for it might.

Last December, it was told here how China may be approaching the Lewis Turning Point, when the country runs out of workers to migrate from the countryside into the towns. If this is so, wages in China will probably rise, and then in turn we may see wages in the West rise too.

The last decade or so has seen global savings outstrip investment, creating cheap interest rates, but creating a problem of insufficient global demand – leading to downward pressure on wages. This could be set to change, although it will take two or three years before this effect is felt.

See: The world’s most populous country is running out of workers – what are the implications?

http://www.investmentandbusinessnews.co.uk/china/the-worlds-most-populous-country-is-running-out-of-workers-what-are-the-implications/12147

and: Interest rates set to rise as economic tectonic plates shift – is this good or bad news?

http://www.investmentandbusinessnews.co.uk/economic-growth/interest-rates-set-to-rise-as-economic-tectonic-plates-shift-is-this-good-or-bad-news/12136

Well, one thing we can say without fear of contradiction: the global economy is one year older, too, but what has it done?

The Sudoko puzzle
Is China changing?
Wages, the rich, and why super rich is bad for the economy
Currency war
Eurozone’s troubles
Tectonic plates
The cult of equities
Technology and Moore’s Law
Best of the year

Back in January, Meryn King explained it all with a Sudoku puzzle.

And his rather clever little diagram says it all. The global economy began the year with massive imbalances. They have not gone away. See: Why Sudoku explains what’s wrong with the economy In other words, some countries were saving too much, while other parts were spending too much. And in December, the OECD said much the same thing; see: West needs to save more: emerging world needs to spend more, says OECD.

 is China chaning?

But at least China is waking up to reality. There is a growing realisation in China thatshe cannot rely on the export model for much longer, and a part of her transformation lies in wages going up. There are signs it is happening; see: At last, Chinese wages rise: is this the end of bubbles? China solves economic crisis, with cunning plan and . See also: Now China is number one for car sales , and Chinese imports outstrip exports . See also: Not even the IMF can make up its mind over China and the yuan There is an answer to the problem ; see: End of US hegemony, why the Bancor and not gold will be the new currency

And yet China is a complicated country. The central government does not have quite the sway that is commonly thought; see: China: the government is not omnipotent – it is impotent; and that’s where the West has got it wrong

Wages, the rich, and why super rich is bad for the economy

But one of the big problems in the West, especially the UK, is that we are set to get worse off. But more to the point, this is what forecast projections say. Take this table, for example, based on figures produced by the Office for Budget Responsibility:

To put it all another way, it won’t be until 2015 before real wages return to the 2009 level.

Verdict produced research at the beginning of the year in which it drew a similar conclusion; see: We will be worse off in 2013, says report

Part of the problem is that globalisation has created a situation in which corporate profits have been taking up a higher share of GDP, and wages growth has been such that the only way consumers can spend the monies necessary to promote growth, is by running up debt. See; Did globalisation cause the economic crisis? , and see: Why the super rich should pay more tax, and the rest should pay a lot less 

 It seems that as profits have risen across the world, these profits have funded consumer debt. It is supposed to be different. Growth in profits is supposed to fund growth in wages, which creates demand, leading to more corporate profits. Instead, growth in corporate profits has funded consumer debt, which created demand to push profits up even further, but ultimately such a relationship is unsustainable.

Currency war

Then there was talk of a currency war. It was the Brazilian finance minister who really spooked markets with his currency trade warning; see: Print money, or it’s the end of democracy, says Bank of England man; stop printing money, or it’s trade war, says Brazil , and: IMF head Strauss-Kahn warns of currency war . And see also: World leaders accuse each other of being “no good, lousy sons of an expletive” So the US goes nuclear and prints money via quantitative easing, pushing down the dollar, and China refused to allow the yuan to appreciate.

Eurozone’s troubles

Meanwhile in Europe, the slow motion car crash drags on. It is difficult to separate fact from hype within the indebted regions of the Eurozone, but this article may help: Portugal and Ireland – debts, wages and house prices: how do they really stand? . So will the euro survive? One former Nobel winner reckons that eventually it will be Germany that pulls out of the Euro; see: Germany may pull out of Euro, predicts Joseph Stiglitz

Tectonic plates

But look beneath the surface, and there are some fascinating developments.

It seems China is running out of workers, and could be closing in on what’s called the Lewis Turning Point, when a developing country runs out of capacity to grow via workers migrating from the countryside to the towns. But we suspect this is a good news story. Chinese wages will surely rise as a result of this demographic shift, and as a result Chinese imports will go up and we will move a step closer to seeing the end of global imbalances. See: The world’s most populous country is running out of workers – what are the implications?

What is quite interesting is that 2010 saw two reports making similar conclusions. But they differed in one key respect. The first presented its conclusion as if it was bad news. The latter, as if it was good. In the Barclays Equity Gilt Study, Tim Bond, co-author of the report, said: “We are moving from a world of capital abundance to a world of capital scarcity and scarcity of savings. From here on yields should probably double over the next decade…This will happen as pensions liabilities come due and as there is decreasing savings to support the economy.”

He continued: “The financial crisis, from this point of view, happened at the worst possible time – just as this demographic change was starting to take place.

“It is very unlikely that the excess savings of countries like India and in Africa with lower average ages will be able to compensate for the fall in savings in the West.”

The report also said: “The common assumption that future savings flows from the large developing economies will be a ready source of finance for the ageing advanced economies is most probably flawed. The projected trajectory for old age dependency ratios in countries like Brazil, China or Russia are as severe as in the US. It is highly implausible to believe that Africa, the Middle East and India will be capable of funding the rest of the world’s growing population of retirees….Because the rise in old age dependency ratios is common to virtually all significant economies, the idea that a redistribution of global savings flows from surplus to deficit nations might mitigate the impact of ageing on bond markets is a false comfort.”

And yet McKinsey Global predicted a rising demand for capital and falling savings rates, and, like Barclays, said interest rates will rise. That’s not good. But it also predicted a new golden era of growth, like we saw in the 1950s and 1960s. So that seems pretty good. In fact, for what it’s worth, we reckon this was just about the most interesting report we saw all year. See: Interest rates set to rise as economic tectonic plates shift – is this good or bad news?

The cult of equities

And then there’s equities. The FTSE 100 hit its highest level since 2008 yesterday. But what about next year? There is a growing belief it will hit a new all-time high. But what about the underlying forces? Here are some ideas on where equities may be going in the long term.

Is the cult of equities dead?
Is UK stock market overvalued? Part 1
Is the stock market overvalued? Part 2
The cult of equities is still dead, claims bear

Technology and Moore’s Law

Technology may come to our rescue in the end, however. See: The case for optimism , Are commodities the next bubble? , and: New technological leaps could solve fuel crisis

As for jobs.

It seems we will see a race next year. Can the private sector put on jobs faster than the public sector sheds them? See: Private versus public: the great jobs race begins

Best of the year

And finally, why don’t we leave you with
our two favourite articles of the year:
US and China circle each other like sharks preparing to strike , and: Ya who?, Google profits, and the Android from Mars

Alexon, the women’s fashion group that includes the Ann Harvey, Eastex and Kaliko brands, has said like-for-like sales have fallen 20 per cent in the last three weeks, that profits would fall by £1.5m as a result, and that the company may then break one of its banking covenants.

Apparently the store’s clothes are aimed at mature women, which has meant the snow has a disproportionate effect on its sales.

Meanwhile, the FSB has claimed that the bad weather is costing the economy between £600 million and £1 billion every day, and wants to see the government and the banks provide more help to businesses that have been hit especially hard.

It wants to see HMRC extend its Time to Pay scheme to allow small businesses time to recoup lost takings in order to have the cash flow to be able to pay. It also wants landlords, especially where the landlord is the local council, to push back rent reviews due in the New Year.

The FSB also says local councils should use their powers to grant hardship relief and temporarily reduce business rate bills for those businesses in financial difficulty, and that banks, utilities and insurers should give small businesses some breathing space.

John Walker, National Chairman, Federation of Small Businesses, said: “Small businesses were banking on a good Christmas to make up for a bad year and the prospect of more bad news in 2011. Many shops and restaurants have taken on additional seasonal staff to cope with the anticipated demand of the Christmas season, but last weekend saw a drop in footfall of up to 30 per cent, leaving businesses with increased overheads and falling trade.

“The last thing this Government needs is a wave of bankruptcies and shop closures in 2011, but small firms will find it very difficult to bounce back in the New Year when VAT increases to 20 per cent and the spending cuts start to bite.

“We need to see a co-ordinated effort from Government, banks, local authorities and landlords to give small businesses some breathing space to recover in the New Year.”