Peter MacMahon: Cold hard numbers say it is too soon for green shoots

Published on Wednesday 1 July 2009 21:15

IT WILL not come as much consolation to you if you work at a soon-to-close Diageo plant or for a threatened shipbuilding company, but there were further signs yesterday that things are looking up.

Two pieces of research have added to the expectation that the worst of the recession might – just might – be over and that Lord Mandelson's "green seedlings" may be about to sprout.

First we have the famous PMI research into the state of manufacturing. OK, perhaps famous is something of an exaggeration for the dull- sounding Purchasing Managers' Index report.

However, the latest PMI appears to add to the hopes that the recovery in the economy is on the way, if not under way.

The key points are that manufacturing PMI rose again in June, hitting a 13-month high; production increased for the first time since March 2008 and across a broad base of sectors; and downturns in new orders and employment eased further.

Overall, the measure of manufacturing activity across the UK is now at 47, up from 45.4 in May. Still a negative – a 50 figure indicates stability and anything over that growth – but it is moving in the right direction.

Why does this matter? Well, the index is a complex composite of data based on reports from firms for new orders, production, employment, suppliers' delivery times and stocks of purchases.

In a world where everyone and their significant other is producing surveys in the hope of getting a bit of publicity, the PMI has credibility.

For many years our own Royal Bank of Scotland used its data to give it an insight into the economy north of the Border, though as it tightens its belt that relationship has come to an end.

However, the reason that RBS believed PMI was important – and respected financial analysts north and south of the Border look for its research – is that it gives an indication of trends across manufacturing, construction and services.

In all three of these areas – we will see the figures for the other two sectors over the next two days – there are suggestions that the worst is behind us.

Another sign that things can only get better (maybe) came yesterday from self-styled "recovery, turnaround and restructuring" specialists Grant Thornton, though in plain language they are accountants.

They found that the percentage of positive trading statements issued by retailers on the London Stock Exchange during the second quarter of 2009 has reached the highest recorded level, at 70 per cent.

Furthermore, the Grant Thornton Quoted Retail Companies Index (GTQRCI – what about that for an acronym) for the second quarter found that 13 per cent of retailers posted negative trading updates compared with 25 per cent last year.

They also found that 25 per cent of listed retailers also issued negative trading updates in Q1 2009.

With commendable journalistic panache, Grant Thornton adds that, "astonishingly", no individual retailer reported a profits warning in the last quarter – the first time this has occurred since the research began four years ago.

Now, journalists are often said by those whose activities we report in the world of business to be too negative, talking down the economy, purveyors of doom, not to mention gloom.

But at the risk of being counted as a monger of doom, never mind gloom, we would do well to treat these positive signs with some caution, though they are, of course, welcome.

First, it could still be possible that we are in the midst of a "W" recession, as explained by my learned friend and colleague Bill Jamieson on these pages.

We may, for all we know, be seeing the signs of the middle of the "W" and a further fall could happen before a proper recovery really begins.

Second, there are many other indicators that paint a less rosy picture – from other surveys to the results and reports that companies produce for the stock market every day.

In manufacturing, the subject of the latest PMI, we have, for example, heard that even Aggreko, one of Scotland's most successful companies, thinks things will slow down this year.

Aggreko shares dropped 6 per cent one day last month after it revealed it had cut its capital expenditure and warned of further weakening in demand.

In retailing, to take the area looked at by Grant Thornton, Currys and PC World retailer DSG International recently reported that it had chalked up a second year of annual losses and warned that electronics markets were likely to remain tough in the year ahead.

So, if one leaves the general surveys aside and looks at what companies are reporting in terms of hard numbers, all is still not well.

And the growing levels of unemployment – what economists coldly call a "lagging indicator" – suggest that, for the country as a whole if not for business, the worst is yet to come.