Service sector activity was again robust last month, albeit not quite as strong as market expectations. A PMI of 56.7 was 0.5 points short of its level at the start of the year but still indicative of very solid growth.
February was supported by another healthy gain in new orders from domestic and overseas buyers alike and also saw a further rise in backlogs amidst increasing signs of capacity pressures in some areas. The sector's headcount was sharply higher and its rate of expansion was the second fastest on record. Business expectations hit a 3-month high.
Input cost inflation accelerated despite falling energy bills and there was fresh evidence of a pick-up in wage settlements. As a result, service provider charges increased for a third month in a row but, crucially, inflation continued to be held largely in check by competitive pressures.
If the PMI results are to be believed the UK economy will expand at around a 0.6 percent quarterly rate in the January-March period. For services and construction, business activity is clearly already growing at a rapid enough clip to accommodate higher wages and capacity pressures are becoming more of an issue. However, for now final selling prices in general remain restrained by market conditions and so long as this stays the case, the BoE MPC's hawks will probably struggle to win their argument.
The Markit/CIPS UK Services PMI covers transport & communication, financial intermediation, business services, personal services, computing & IT and hotels & restaurants.
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM non-manufacturing index in the U.S. and the Markit Services PMIs elsewhere, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The Markit PMI services data give a detailed look at the services sector, how busy it is and where things are headed. The indexes are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.
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