Service sector activity evolved much as expected at year-end. The PMI was 55.5, down just 0.4 points versus its unrevised October reading, consistent with the average rate of growth seen over the second half of 2015 and just above its 55.2 long-run average.
The latest expansion was supported by another solid gain in new business, albeit at a slightly slower rate than seen in mid-quarter, and backlogs also rose at their sharpest pace since August. Historically, job creation remained strong but the increase in headcount was the smallest since July and year-ahead business expectations declined to their lowest level since February 2013.
Of potentially some significance to the BoE, December saw the sharpest rise in input costs in five months, mainly reflecting higher wages. That said, output prices rose only marginally and well below their long-term mean.
December's service sector PMI makes for a composite output index of 55.5, a dip of 0.2 points versus its November outturn. While still indicative of respectable growth at year-end, the signs are that overall private sector business activity is cooling in which case the apparent increase in wage pressures may be only short-lived. At any rate, with output prices largely becalmed, today's data should do nothing to pull forward the timing of any hike in Bank Rate this year.
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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