Merryn's Blog

The FTSE can't ignore the real economy forever

The FTSE 100 might still be rocketing, but the latest data from the UK's manufacturing sector suggests the real economy's fragile recovery is running out of steam.

The FTSE 100 might be rocketing, but the real economy is a lot less healthy. Today's purchasing managers' index (PMI) data shows that activity in the UK's manufacturing sector continued to shrink in September, as employers cut jobs for the 17th month in a row, and the pick-up in new orders slowed.

The headline manufacturing PMI dropped to 49.5 from 49.7 in August - a reading below 50 implies that activity is falling - which surprised analysts, who'd expected a rise to 50.3, says Reuters. "The latest manufacturing data suggests the industrial recovery is losing steam", says Vicki Redwood of Capital Economics.

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For now, this is a setback, rather than disaster. "The picture is one of consolidation not contraction", says Rob Dobson at Markit. "New orders are rising, sterling is supporting export sales as overseas markets improve and the key orders-inventory ratio remains at an elevated level". In other words, companies are still only making as much as they can sell, so they're not into oversupply territory yet.

But the point is that even as the stock market soars, fuelled mainly by Chinese commodity buying and taxpayer-funded bank bailouts, the harsh reality for most people working in British industry and commerce is that there will be many months when some of the economic noise sounds better, and just as many when it's worse again.

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That matters. Because as Edward Hadas points out on Breakingviews.com, "unless the recovery takes a sharp V-shape, earnings could disappoint, dragging shares down." And with the poorly condition of the banks likely to get in the way of any recovery - for more on this, see today's Money Morning (How the banking sector could derail the rally) disappointment seems more likely than not. The stock market may be shrugging off the state of the economy for now, but it can't do so forever.

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