U.K. CBI Orders Erode in October

U.K. survey gives a mixed view of short-term industrial trends The U.K. survey from the Confederation of British Industry (CBI) on industrial data shows total orders at a -4 reading in October compared to a -2 reading in September and -7 in August. Despite this waffling short-term progression, strength in orders has been slipping more broadly with a 12-month average at +14, a six-month average at +7 and a three-month average at -4. The October orders reading itself has a queue standing on data from 2015 at its 41st percentile, below its median (the median resides at a level of 50th percentile). However, on longer-dated data back to 1991, the queue standing for the orders variable is substantially stronger at its 70.6 percentile, well above its median. The U.K. economy has been relatively stronger since 2015 accounting for the lower standing of the October reading over this more recent period. Evaluated over the longer time series of data, the current reading is less troubling and relatively firm compared to the short-dated observations. These differing baselines make it more difficult to evaluate the U.K. readings with confidence.

The U.K. situation However, none of these observations mask the fact that the U.K. economy is weakening and that it faces turmoil in its financial markets, weakness for the pound sterling, and political difficulties, having just placed its third Prime Minister in office this year. Inflation in the U.K. remains high although it shows signs of having peaked and, perhaps, it is ready to move lower. But current inflation in the U.K. is too high and the task ahead for the Bank of England is made more difficult by the fact that the economy has weakened.

The rest of the current survey The CBI survey shows weak export orders at a -14 reading in October from -8 in September and -12 in August. This series has an average of -4 over 12 months as well as over six months that deteriorates to an average of -11 over three months. The order series for exports has a queue standing in its 37th percentile on data back to 2015 but improves to a 55.4 percentile standing on data back to 1991. One reading has a weak standing; the other is moderate

Stocks of finished goods have an October reading a +7 compared to +6 in September and +2 in August. The 12-month average is -7, rising to -1 over 6 months and to +5 over three months. Inventory levels are showing some signs of having been rebuilt. With orders fading, this may not be a desired trend.

The outlook Looking ahead, the U.K. output volume reading for the next three months has improved to +7 in October from -17 in September and -2 in August. However, looking back at the time series, the average over 12 months is 16, the average over six months is +6 and the average over three months is -4. The sequential averages show that there's a deterioration in the outlook for output volume three-months ahead even though the October monthly figure itself shows a strong turnaround from a very weak reading in September. We know enough about the U.K. economy, and its difficulties to be somewhat skeptical about the notion that there has been a sharp turnaround in the output volume outlook.

One of the reasons that the output outlook for the U.K. economy remains difficult and strained is because of inflation. In October the outlook for prices three-months ahead fell to 46 from 59; the August reading had been 57. The 12-month average for the outlook for prices three-months ahead is 64 following a reading of 57 over six months and 54 over three months. There is a monthly progression showing pressure is coming off prices and a sequential average progression that reinforces that trend. That's good news; however, the price level numbers are still extremely strong. The price reading for October- despite its decline- still has an 83.3 percentile standing on data since 2015 and a 96.6 percentile standing on data from 1991. That's the inflation part of the outlook. Output volume over the next three months has only a 33.3 percentile standing compared to data since 2015 and only a 40.8% standing compared to data since 1991. Either way the look-ahead for output volume is below its median despite the fact that that series has improved in October. Inflation improvement is too small to be construed as good news yet.

Industrial output readings lag but tell a clear story At the bottom of the table, we include the summary data for U.K. manufacturing output. The most up-to-date reading for that is in August and it shows a 1.6% drop month-to-month. The three-month change in output shows a 13.2% drop at an annual rate, the six-month change shows an 8.1% drop at an annual rate, the 12-month result shows a 6.7% drop. These progressive growth rates show how industrial output has been declining more rapidly over recent periods. And the ranking of the IP data over either period is unambiguously weak in the lower 2.7% of its queue on either timeline. However, the output data themselves from the industrial production indicator are only up to date through August. The CBI survey is up to date through October. But it is unlikely that those trends have turned around in any significant way because of the clear forces have been battering the economy and because of the impact on financial markets.

Summing up For now, the CBI survey seems to have failed to pick up some of the weaknesses and challenges that the U.K. economy is experiencing. It seems to have captured some relieved pressure on prices. And the sequential averages are moving in directions that seem reasonable based on other data we have been looking at, but the October data per se are a slightly better spin on reality than what we would expect looking at real time events in the United Kingdom and especially looking at events in markets.