Bottom line: The UK Markit/CIPS manufacturing PMI showed a more significant deterioration in August than had been expected, with the headline index declining to its lowest reading since last November, at 54.3 (SA) after a revised 56.9 in July (revised down from 57.3 previously).

Moreover, there was a significant reduction in the new orders component, and in particular the gap between the diffusion indicies for new orders less finished goods inventories has dropped significantly, to its lowest level since March, 2009, and suggesting that the pace of manufacturing production expansion is set to slow significantly (see top RH chart, below).
 

Details
 
The output index was at 56.0 in August, vs. 58.2 in July and a cyclical high of 62.1 in February (top LH chart). Markit noted that growth had "slowed sharply at consumer and intermediate goods producers, but accelerated slightly in the investment goods sector". However, "a number of companies reported that the expansion in output had been partly sustained through reducing backlogs of work", which had been reported by different sectors and by SMEs and large firms.

The new orders index was 52.0 in August, down sharply from 58.5 in July (see LH chart, below). Some companies reportedly said that the weaker reading reflected subdued client confidence and uncertainty regarding public sector cuts. The export orders index improved from 50.8 in July (which had been an eleven month low) to 52.1, with panellists reporting increased sales to Australia, China, France, Germany, the Middle East and Netherlands, with broad-based improvement in orders, particularly for capital goods exports.

The finished goods inventories diffusion balance rose to 48.1 in August from 45.5 in July. Firms reported that they had settled existing contracts from inventories to reduce levels of outstanding business. The employment index has been tapering off from the cyclical high of 54.6 hit in June, and in August was 51.9, down from 52.5 in July.

The output prices diffusion balance continued to be relatively firm at 59.1 in August, after 58.0 in July and 59.4 in June, with some firms attributing this to increased demand. Meanwhile, the diffusion balance for input prices slipped to 64.0 in August from 65.9 in July and the cyclicaly high of 74.2 in May. Hence, the gap between output and input prices, which could be taken as an indication of corporate profit margins, has begun again to widen out.

source: BarCap