With much attention focused on the high street at present, a new and important item of economic news may go unnoticed: British manufacturing seems to be on the mend.

There is no doubt that factories are buzzing again. In November the Chartered Institute of Purchasing and Supply purchasing managers’ index rose at its fastest rate since December 1999, to 54.5, where a score of 50 distinguishes expansion from contraction. This index has continued to accelerate over the past five months, and the new-order index is rising at its strongest rate for nearly four years, driven by both domestic and foreign demand.

Output rose by 1% during the month, although the yearly increase in the latest three months was just 0.4%. Among timber product manufacturers the picture remains mixed: output from sawmills rose 0.4% annually in the latest three months, while veneer sheet and plywood fell 4.1%, but carpentry and joinery rose 0.6%. Output of kitchen furniture was up 8.7%, but other furniture fell 5.6%.

Capital investment by manufacturers dropped by 5.6% in volume during the third quarter and by 11.8% over the year, say government statisticians. Stock levels of finished goods have been run down to a level last seen in August 2002, according to a CBI survey. The next phase of the manufacturing recovery should bring an increase in both capital spending and stock building.

Consumer spending

But the fresh signs of life in manufacturing do not mean consumers have stopped spending, although outlays in the high street in the first half of November were disappointing, the CBI says. The month closed with 27% of furniture and carpet outlets reporting higher sales than in November 2002 – down from 34% in October but only 8% last November. However, the CBI says retailers are confident of a pick up in December and suggests volumes may be much higher than last Christmas. It adds that retailers are continuing to order more goods from suppliers and are optimistic that the business situation will improve over the coming three months.

Nonetheless, results of the latest survey of consumer confidence are none too bright. Martin Hamblin GfK says that after a peak in July followed by a three-month plateau, the index has dropped back to its lowest since the Iraq war. The fall is mainly due to a drop in optimism about the overall economic situation and to consumers’ views on whether it is the right time to make major purchases. It is now considered a much less favourable time to buy items such as furniture and household appliances as well as housing, than in October. This measure now stands at its lowest since December 2000, largely reflecting the Bank of England‘s quarter-point increase in interest rates and the perception that further rises are in the pipeline.

Taken with news from the Bank of England that the number of new mortgages granted in October fell to 117,000, from 120,000 the previous month, the drop in consumer optimism suggests that the slowdown in household spending needed to help re-balance the economy is on its way.

But the housing market will take time to respond and the construction purchasing managers’ index indicates that activity continued to expand in November. Growth in commercial work slowed slightly during the month, but civil engineering is increasing at the fastest pace since November 2002.

The cost of building materials rose sharply in November, says CIPS. The index is at an 11-month high and is accompanied by lengthening delivery schedules. Higher levels of activity in construction have also stimulated further growth in the workforce, although some firms are choosing to expand capacity by the use of sub-contractors.

Labour market

Signs of tightening in the labour market come from the Recruitment and Employment Confederation. It says demand for staff was at a 33-month high in November and skill shortages are now beginning to appear, putting upward pressure on pay.