Euro area factory output rose at its fastest rate in more than four years, and the survey says producers got there by working through orders placed in earlier months

Euro area factories produced more in July than in any month for the previous four and a half years. The survey that says so also says where the work came from, and it was not the order book.

The S&P Global Eurozone Manufacturing PMI, published on Monday under an embargo that lifted at 10:00 Central European Summer Time, put the headline index at 51.9, up from 51.4 in June and the strongest reading since April. The output component reached 52.9 against 51.7 a month earlier, its highest in 52 months. New orders rose as well. Only marginally, the release says, at a pace trailing production by what it calls a notable margin.

Outstanding business fell for a third consecutive month, and the rate of depletion was the strongest since January. Chris Williamson, chief business economist at S&P Global Market Intelligence, is quoted in the release saying new work inflows "remain worryingly weak, meaning producers are having to rely on orders placed in prior months to drive the latest increase in production".

What the factories did with the month

They cut. Employment fell again. Purchasing volumes were reduced for a second month running, and goods producers lowered their stock levels both before and after production, which is the behaviour of a sector shrinking its commitments rather than one gearing up to meet demand.

Demand from export markets deteriorated again, although the contraction was marginal. The release names France, Spain, Italy and Austria as the countries where new business from abroad fell, and says those reductions narrowly offset growth elsewhere. Its export measure includes trade between euro area members.

The four largest economies did not move together. Germany was the best performer, posting what the release calls its joint-strongest index reading in more than four years. Italy stayed in expansion with growth slowing to a four-month low. Spain and France were broadly stagnant.

One line in the methodology worth knowing

The headline PMI is not a measure of output. It is a weighted average of five components: new orders at 30 percent, output at 25 percent, employment at 20 percent, suppliers' delivery times at 15 percent and stocks of purchases at 10 percent.

The delivery times component is inverted. Longer waits for supplies therefore add to the headline number rather than subtracting from it, on the reasoning that suppliers slow down when demand is strong. Average delivery times lengthened considerably again in July. The release attributes the pressure to conditions since the war in the Middle East began, and records that the deterioration in vendor performance was the least pronounced since that war started.

Costs

Input costs rose at what the release calls another historically elevated rate, with the pace of inflation easing to a five-month low. Factory gate price increases softened in turn and were the mildest since March. Business confidence about the coming 12 months rose to its highest since February and stayed below its long-run average.

The survey collected responses from around 3,000 companies across Germany, France, Italy, Spain, the Netherlands, Austria, Ireland and Greece, between 9 and 24 July. A reading above 50 means more firms reported improvement on the previous month than reported deterioration. It does not say how much was made.