|Composite - Level||51.6||50.7|
|Services - Level||51.5||51.3|
Services PMI edged up to a reading of 51.5 from 51.3 in April, signalling a further positive improvement in business conditions at Japanese services firms. The latest reading was the highest of the year so far. According to survey participants the latest increase in activity was attributed to the start-up of new products, economic recovery and an expansion in new business. Manufacturing also improved in May. The composite output index climbed to 51.6, up from 50.7 in April, indicating a further expansion in overall activity.
A rise in service sector activity was supported by a further increase in new orders at Japanese services companies in May. Furthermore, the rate of expansion was the sharpest since November last year. The service sector hired additional staff for the second month running. Although marginal, the rate of growth was broadly in line with the average seen over the past year-and-a-half. Some surveyed firms mentioned an improvement in business operations leading to higher payroll numbers.
Pressure on service sector capacity was evident, as backlogs of work accumulated alongside a further increase in new work intakes. The rate of growth in backlogs slowed, however, to only a fractional pace. In contrast, manufacturers reported a fall in backlogs for the third month running.
On the price front, purchasing prices at Japanese services firms rose, amid reports of higher staff wages and an increase in raw material costs. Moreover, the rate of inflation was the strongest since December 2014. Subsequently, charges increased, as service sector providers passed on higher cost burdens to their clients. Meanwhile, in the manufacturing sector, input costs continued to increase, although at the weakest rate in the current 29-month sequence of inflation. Similarly, manufacturing charges rose only slightly.
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'.
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 purchasing managers' manufacturing indexes, 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.
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