New orders fall at fastest rate in three years, says PMI report

Construction output rose slightly in August, but new orders fell at their fastest pace since May 202, according to the latest PMI report.

Data showed UK construction companies recorded a marginal increase in total business activity last month with growth in the commercial and civil engineering sectors helping to offset a slump in house building. 

But business activity forecasts for the year ahead were the weakest since January and job creation lost momentum since the previous month. 

This was largely due to falling sales volumes across the construction sector, as signalled by the fastest decline in new orders for just over three years.

The S&P Global/CIPS UK Construction Purchasing Managers’ Index® (PMI®) - which measures month-on-month changes in total industry activity – was 50.8 in August, down from 51.7 in July, signalling only a slight increase in overall construction output.

Commercial building continued to expand at a robust pace (index at 54.2), with the rate of growth holding close to July’s five-month high. 

Civil engineering activity (52.4) also increased, but the speed of growth slipped to its lowest since April. 

House building remained the weakest-performing part of the construction sector (40.7), with the downturn the second-fastest since May 2020. 

Survey respondents widely commented on subdued market conditions and a headwind to activity from cutbacks to new build projects.

August data signalled a decline in total new order volumes for the second time in the past three months, which contrasted with solid growth in the spring. 

Although only modest, the downturn in order books was the steepest since May 2020. 

Construction companies noted that rising interest rates and concerns about the near-term economic outlook had led to more cautious spending among clients, especially in the residential building sector. 

Employment numbers increased for the seventh month running, but the rate of growth weakened since July and was only modest. 

Suppliers’ delivery times for construction products and materials meanwhile improved at a robust pace. 

Latest data signalled only a marginal rise in purchasing prices and the rate of inflation eased since July. 

A number of firms cited more competitive market conditions and successful price negotiations with suppliers to account for falling raw material costs. 

August data indicated construction companies are relatively cautious about the outlook for business activity during the next 12 months. 

The degree of positive sentiment slipped to its lowest since January, with concerns about the impact of rising borrowing costs and subdued housing market conditions often cited during the latest survey period.

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said: “Resilient demand for commercial work and infrastructure projects are helping to keep the construction sector in expansion mode for now, but the survey’s forward-looking indicators worsened in August. 

“Total new orders decreased at the fastest pace for more than three years amid worries about the broader economic outlook and the impact of elevated borrowing costs. 

“Rising risk aversion also meant that construction firms pared back their own output growth projections, with business activity expectations slipping to the weakest since January.”

John Glen, chief economist at the Chartered Institute of Procurement and Supply (CIPS), added: “Though the construction sector overall showed an improvement in August, several imbalances in the figures give cause for concern.

"Residential building took another knock further into contraction as new housing starts weakened. The cost-of-living crisis continued to squeeze household finances and buyers were reluctant to commit in the shadow of potentially another interest rate in September. 

“Housing activity fell at its second sharpest level since 2009, excluding the pandemic years, and overall new orders dropped at the fastest rate since May 2020. 

“The sector was propped up overall by some improvements in commercial activity such as office refurbishments.

“This below par performance had a knock-on effect on job creation which was starting to lose momentum. 

“The right skills remained in short supply and without pipelines of new work coming through, recruitment levels were reduced.”

PMI data was collected from August 11-30 August.