UK service sector activity unexpectedly slowed in May. At 56.5, the PMI was fully 3 points below its April mark and, while still indicative of solid growth, at its weakest level in five months.
In line with the headline performance, inflows of new work remained historically strong but decelerated versus April. Even so, backlogs continued to increase and headcount rose sharply again, albeit at a reduced pace versus last time. Meantime, the end of general election uncertainty was cited as a factor behind a rise in optimism about business prospects over the year ahead.
Input costs increased at their sharpest rate in eight months on the back of higher salaries and fuel and food charges. Service provider charges also rose but relatively modestly and only after their steepest rate of decline in more than three years in April.
Combined with the other PMI surveys, today's report puts the composite output index at 55.8, a 2.3 point drop versus its level at the start of the quarter. This should be consistent with real GDP expanding at a quarterly rate of around 0.4 percent following a provisional 0.3 percent gain in January-March. If so, the likelihood of a hike in Bank Rate this year would remain limited although financial markets will need to keep a wary eye on wage developments.
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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