Service sector activity accelerated significantly in June. At 58.5, the sector PMI was up fully 2 points versus May's 5-month low and comfortably exceeded market expectations. It also left the second quarter with the highest average since the third quarter of 2014.
New business was again robust although the increase here was also the smallest so far in 2015. A similar pattern was seen in employment where another otherwise healthy gain masked the slowest growth rate in half a year. In fact the deceleration in orders saw service providers supporting output by running down backlogs for the first time since March 2013. Even so, business confidence levels remained high with the end of election uncertainty providing a useful boost.
Inflation news was mixed with another solid increase in costs only translating into a modest rise in charges amidst the familiar reports of very competitive markets.
The PMI data suggest that the economy expanded around 0.5 percent in the second quarter, up a tick from the first quarter outturn. This should leave the BoE unmoved. However, the recovery remains worryingly unbalanced and largely dependent on consumer demand and services. This may not matter for now but it means that there is a serious question mark hanging over the medium-term outlook.
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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