Rate Cuts - Surveying the Evidence

The Bank of England’s press release to accompany the 1 per cent reduction in policy interest rates first makes reference to a further weakening of activity shown through business surveys. See below

“In the United Kingdom, business surveys have weakened further and suggest that the downturn has gathered pace. Consumer spending and business investment have stalled, while residential investment has continued to fall. Activity indicators in the rest of the world have also weakened, though the further depreciation in sterling should moderate the impact of weaker global growth on the United Kingdom. And a number of fiscal measures to boost near-term demand are in train, both in the United Kingdom and overseas.”

The emphasis given to survey data is the aspect of today’s rate cut that I want to explore briefly in this blog.

There are any number of surveys of business sentiment and expectations - some have been around for a long time such as the CBI Industrial Trends series and the quarterly surveys of orders, confidence and capacity utilisation carried out by the British Chambers of Commerce.

We also have monthly results from the Purchasing Managers Index and surveys on consumer sentiment from the Nationwide Building Society and GFK together with activity reports in the property market from bodies such as the Royal Institute of Chartered Surveyors.

These are the high profile surveys, there are hundreds of others from trade bodies, trade unions - in fact it seems that there is a new survey virtually every day. It can be difficult to keep track of them and to work out which have credence and which do not.

The data that caught my eye this week - and which the members of the Monetary Policy Committee will undoubtedly have spent some time digesting - was the staggeringly weak numbers from the Purchasing Managers Index for both manufacturing and services. The chart for this series is above. The PMI is widely regarded as being a good ‘lead indicator’ of where output and jobs are heading in the near term. A data reading of above 50 is said to be consistent with businesses looking to expand short term production and therefore stepping up their orders from supply-chain businesses. A result below 50 is consistent with a contraction of production with firms cutting back on orders of components and raw materials.

The most recent PMI data is shown below and is the weakest since it was first published in the early 1990s - the last time the UK economy was mired in a recession. Here is one piece of the complex jigsaw that persuaded the MPC to cut rates by a further 1 per cent today and move official policy rates closer to the floor. What price zero interest rates by the time of the March 2009 Budget?