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Economy in Brief

UK CBI Survey Backs off Highs... but Sees Strong Export Orders
by Robert Brusca  October 21, 2021

The Confederation of British Industry (CBI) Survey for the UK industrial sector shows total orders backing off in October to a reading of +9 from +22 in September. This survey is in a diffusion form so that a +9 reading implies that 9 percent more surveyed members responded that orders would be higher than responded that orders would be lower. These indices are sometimes referred to as ‘net readings’ since they represent ‘up-minus-down’ responses by category.

Using diffusion data
However, these net readings have little meaning in and of themselves. We try to give these readings meaning by providing the context of recent averages and the progression of various average readings as well as by ranking the current value in a queue of historic data. Queue or rank standings tell where this month’s topical value stands relative to all past values since 1991 or 2015 depending on the perspective chosen (far righthand two columns). These readings give context and meaning to the current reading.

Order trends
In October total orders have a reading of +9 that compares to an average of +16 over 3-months +17 over six months and -3 over 12 months. Ranked from 1991 the October reading has a 93.4 percentile standing (meaning fewer than 7% of the readings on that timeline were stronger. Ranked from 2015, a shorter more recent timeline, the October value has a 79.5 percentile standing. That tells us it has been higher only about 20% of the time on the shorter timeline. The difference in the two rank standings is a reminder that conditions since 2015 have been stronger on average than over the longer period. That is why all the CBI metric rank lower over the 2015 period than over the 1991 period. This difference in ranking also reminds us that ranking values, while extremely useful, are relative. The comparison with the recent averages shows us that over the past six months conditions in UK orders have improved sharply from what they were over the previous six months (the full 12-month average, when they were negative) But over 6-months and 12-months orders have been even keeling. Averaging does remove detail from the data. The monthly data show a slightly different picture with the October order reading substantially weaker than it was in August or September.

Interpreting the trend
These data paint a mixed but rich picture of the current observation. Yes, it is slipping. The October level is well below its September and August levels. It is also well below its averages over six months and three-months. But it is still a level that represents a considerable change from 12-months ago and the raw ranking for October is firm to strong when placed in historic perspective. The fact that orders have shifted lower in the month may be an issue for the future or it may just be that orders have descended to a still-strong but more sustainable reading. These are things we will look to evaluate in other data from the table as well as in coming months.

Export Orders
Export orders show a net negative reading in October. There are more respondents who found export orders fell that found them to rise, hence the negative net reading. However, when we evaluate this reading, we see it is a significant slowing from its September reading but it is a stronger reading than in August, than over 3-months, than over-6-months and, than it is over 12-months. Like overall orders export orders have been improving but that trend took a step back in October. Still, the historic ranking for export orders is solid-to-firm with a 73-percentile standing on data back to 1991 and a 61-percentile standing on data back to 2015.

Inventories (stocks)
Stocks (inventory levels) on the other hand show very consistent reading in recent months as well as over 3-months and 6-months. They are, in October, considerably weaker than their 12-month average. Their historic ranking is exceptionally low on either timeline. The inventory survey response is consistent with a wealth of data and news reports we see and hear telling us that firms are having supply chain problems. They are having a challenging time getting product and therefore are not able to carry much inventory at all. Inventories remain exceptionally thin and new goods produced or received are almost immediately shipped out the door to customers. It has been that way for about the past six months or so.

Look-ahead for output: next three-months
The look-ahead reading focused on the next three-months differs from order series. Even though orders have weakened the outlook has improved from a net reading of +26 in August to a nearly unchanged +25 in September to a stronger +33 in October. The October reading is stronger than any of the sequential averages. But those averages show a considerably weaker +18 average for 12-months a much stronger +32 for 6-months and a slightly backed-down +28 reading over three-months. The October reading ranked on the two historic timelines stands at its 98th percentile and 94th percentile, respectively. This is a strong reading for output expectations, and apart from prices it is the strongest relative standing in the table suggesting that expectations not past momentum are still pulling things ahead.

Prices: next three-months
Average prices for the next three-months also show a good deal of strength and a lot of that has suddenly appeared in October as the net reading rose to +59 from +41 in September. The sequential averages show building strength in expected average prices with a jump from 12-months to 6-months and then slower increases in prices pressures…at least until the October gain registered.

Comparing the CBI with other measures
Prices: Interestingly despite these survey results UK consumer prices backed off their accelerating profile as prices advanced just 0.2% in September after rising by 0.5% in August. By comparison producer prices in the UK for manufactured goods have also slowed slightly in September and have stayed at more moderate gains for the core measure- so far.

Growth: However, the Markit survey which we can evaluated Vs data back to 2017 shows a manufacturing PMI standing in its 82nd percentile, weakening slightly in September relative to August. Traditional industrial data (like industrial production, a report that actually counts up output volume rather than surveys members and aggregates their up-down results) produces a different result. Manufacturing data also lag the CBI format. IP in the UK declines over the most recent three-months (May to August) while gains are strong over 6-months and 12-months These results are consistent with the CBI data except that the IP report depicts more weakness than in the CBI data series over the most recent three-months. However, manufacturing output springs back to log a solid/strong gain month-to-month in August, its most recent observation.

Summing up
On balance, the CBI survey shows a strong recovering economy. No economy moves in a straight line up for long. The little bit of vacillation we see in the series does not seem serious, but as always fluctuations bear watching. The IP and Markit data support the CBI trends, trends that are more up to date than either of these two series. And the inflation readings are all worrisome and a cautionary posture is recommended. Unilever’s finance chief has warned that inflation next year is going to be higher, although that is not what central bankers are forecasting and basing policy on (Source: More).

“Bank of England Governor Andrew Bailey has said he continues to believe the recent jump in inflation - currently at 3.1% and forecast to climb - is temporary but the British central bank is widely expected to be the first major monetary authority to raise rates in the post-pandemic cycle.” (Source)

Inflation outlook
The inflation outlook is one of the most hotly debated items in policy circles these days. Central bankers and finance ministers who have their hands on the controls are wary of letting up on stimulus – in various countries for various reasons. But the upshot is that serious onlookers and market participants are more concerned and inflation surveys continue to show expectations for more inflation ahead. Central bankers may resist hiking rates because inflation currently is not a monetary phenomenon. It is the product of getting the economy back in gear and getting those gears to mesh on global supply chains. Still, if inflation is allowed to rise unopposed and if interest rate stay low as inflation rises central banks ‘that contend that they are not behind the curve now’ may find that such protestations are not true in the future. Current financial policies are providing forward impetus to the economies and to prices and all of this could have a huge impact on pricing ahead if people and firms ‘get used to’ having and seeing prices rise. The previous decade and longer was one in which firms were reluctant to hike prices. That was one of the hallmarks of price stability. It was not that inflation expectations were low but that firms saw a lot of competition and did not think they could raise prices and keep their customers, too. When that psychology is gone why should that era of price stability that it engendered remain? Central bankers are not addressing that question or the issue about whether all the supply chain relocating will change pricing policies either. Central bankers right now want to pretend that this is an inflation bubble and when it bursts, we will land and will be back in Kansas. But like Dorothy in the Wizard of OZ maybe this cycle of prices will drop us in a wholly different spot with very different actors and trade-offs. That could be a horse of a different color for policymakers.

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