GB: CIPS/PMI Services Index

Thu May 04 03:30:00 CDT 2017

Consensus Actual Previous
Level 54.5 55.8 55.0

UK services had a good April and once again outperformed market expectations. At 55.8, the sector PMI was up nearly a full point versus its unrevised March reading to signal the strongest increase in business activity so far this year.

The solid headline print reflected an acceleration in new business, another rise in backlogs and, while quite modest in absolute terms, one of the largest gains in sector headcount in the last twelve months. However, although business sentiment about the year ahead remained high it also slipped to a 5-month low on worries about the potential impact of rising prices on household spending.

Meantime, input costs continued to climb sharply but the inflation rate still dropped to its lowest mark in seven months. Service sector selling prices increased at their fastest pace since July 2008.

Taken together with surprisingly firm readings on both the manufacturing PMI (57.3) and its construction sector counterpart (53.1), today's services update paints a healthy picture of the overall UK economy last month. Indeed, the composite output index rose more than a point to a very respectable 56.0. As such, the report will bolster hopes that the slowdown in economic growth at the start of the year will prove only temporary, even if there has been some loss of underlying momentum. Nonetheless, the BoE MPC should still leave policy on hold next week.

The Services Purchasing Managers' Index (PMI) provides an estimate of service sector business activity for the preceding month by using information obtained from a representative sector survey incorporating transport and communication, financial intermediation, business services, personal services, computing and IT and hotels and restaurants. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The data are compiled by the Chartered Institute of Purchasing and Supply (CIPS) and Markit.

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.