IN: PMI Services Index

Wed Jun 03 00:00:00 CDT 2015

Actual Previous
Level 49.6 52.4

Business activity in services contracted for the first time in thirteen months in May. At 49.6 the sector PMI was almost three points short of its April print and, more significantly, below the 50 growth threshold.

May's slide was largely attributable to a fall in new orders, their first, if only marginal, drop since April 2014. Employment was essentially unchanged at the previous month's level and another increase in backlogs was more a function of late payments by clients than an indication of building pressure on capacity. Confidence in the year ahead improved to a 4-month high but was still below its historic norm.

Meantime, input costs rose and at an accelerated rate but remained below the survey's long-run average. Even so, output prices still edged firmer.

Taken together with the improvement already posted by the manufacturing PMI (52.6) the composite output index declined from April's 52.5 to 51.2, its weakest mark in seven months. Economic activity in May will have been hit by the earthquake that struck early in the month and June should see something of a rebound. Nonetheless, today's disappointing results provide all the more justification for yesterday's RBI interest rate cut.

Purchasing Managers' Services Index (PMIs) is based on monthly questionnaire surveys of selected companies which provide an advance indication of what is really happening in the private sector economy by tracking changes in variables such as output, new orders, stock levels, employment and prices across the manufacturing sectors. The HSBC India Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in around 350 private service sector companies. The panel has been carefully selected to accurately replicate the true structure of the services economy.

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 Markit PMIs, 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 survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators the report shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the diffusion index. This index is the sum of the positive responses plus a half of those responding the same.

The Purchasing Managers' Index (PMI) survey methodology has developed an outstanding reputation for providing the most up-to-date possible indication of what is really happening in the private sector economy by tracking variables such as sales, employment, inventories and prices. The indices 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.