UK services had a good December. At 56.2, the sector PMI was up a full point versus its unrevised November reading, comfortably above market expectations and at its highest level since July 2015.
Growth of new business saw its fastest pace in seventeen months while backlogs were up for the fourth time in the last five months. Employment was similarly robust, expanding at the same pace as November's 7-month high. There were also some signs that worries about Brexit have eased slightly as sentiment concerning the year ahead improved a little, albeit remaining short of its long-run average.
However, inflationary pressures continued to build and input costs rose at their second quickest rate since April 2011 as the weak pound continued to take its toll. As a result, service providers raised their charges more sharply than in any month since that date too.
Still, taken together with surprisingly buoyant PMIs for both manufacturing (56.1) and construction (54.2), the upbeat services report suggests that the economy enjoyed broad-based strength at the end of last year. Forecasters continue to predict a marked slowdown in growth in 2017 but, with recent indicators typically overshooting expectations, any deceleration in output should at least be from a higher starting point. Ultimately this should ease open the door to BoE tightening should CPI inflation look like getting out of control.
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.