Service sector growth picked up a little steam in March but was still short of market expectations. At 53.7, the PMI was a full point above its February level but that was the a 35-month low and the latest reading was still the second weakest in half a year and short of its long-run average (55.2).
The volume of new business continued to expand in March but at its most sluggish rate since the upswing began back in January 2013. Backlogs were also up, but only slightly. However, there was better news on employment which saw a solid gain although even here, the rise was less than the average over the current 39-month period of positive growth. Indeed, business optimism about the year ahead remained relatively subdued and confidence levels were close to the weakest seen over the last three years.
Meantime, inflation developments were stronger than for some time. Hence, input costs rose at the fastest pace since September 2014 and service provider charges increased at their strongest rate in more than two years.
In addition to the services index, the PMIs for both manufacturing (51.0) and construction (54.2) already released pointed to rising activity rates in March. Nonetheless, in sum the signs are that first quarter real GDP expanded at about a 0.4 percent quarterly rate which would be a couple of ticks less than seen in October-December. Prospective fiscal tightening and Brexit are clearly factors weighing on business confidence although at least in the case of the latter, the slide in the pound prompted by such worries has provided a boost to competitiveness.
Higher wage gains in services may agitate some of the more hawkish MPC members but at 54.0, the average sector PMI for the first quarter was the lowest since the first quarter of 2013. As such, today's report should leave any hike in Bank Rate as distant as ever.
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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