GB: CIPS/PMI Services Index

February 3, 2017 03:30 CST

Consensus Actual Previous
Level 55.6 54.5 56.2

In line with both manufacturing and construction, business activity in services apparently slowed in January. At 54.5 the sector PMI was still quite comfortably above the 50 expansion threshold but also nearly 2 points below its December mark, well short of market expectations and at a 3-month low.

The deceleration reflected slower growth of new business, backlogs and employment (5-month low). However, a less robust January did not prevent a firming in business expectations and optimism about the year ahead rose to its highest mark since May last year, just before the June Brexit vote.

Inflationary pressures continued to build on sterling weakness and input cost inflation recorded its strongest print since March 2011. Output charges were also raised again and inflation here maintained December's 68-month record.

In sum, the January report is cautiously promising. A modest slowdown in the economy in January would only follow an unexpectedly robust fourth quarter and the main forward looking indicators remain reassuringly bullish. Still, another broad-based decline in the February PMIs would inevitably raise the risk that the potential fallout from the Brexit vote is beginning to be realised.

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.