GB: CIPS/PMI Services Index

Fri Nov 03 04:30:00 CDT 2017

Consensus Actual Previous
Level 53.3 55.6 53.6

UK services comfortably outperformed expectations in October. At 55.6, the sector PMI was up fully 2 points versus its September reading and at its highest level in six months.

The headline improvement was built largely upon stronger new orders which rebounded from a 13-month low at the end of the third quarter to register their sharpest increase since May. Stronger domestic demand was partly responsible. However, elsewhere the survey offered reason for caution. In particular, employment posted its smallest gain since March while backlogs declined for the first time in eight months. Moreover, business optimism about the year ahead remained fragile and well below both its first half-year average and its long-run norm.

Meantime, inflation developments were firm. Input costs continued to climb steeply on the back of more expensive raw material and labour but the inflation rate still fell to its lowest mark in over a year. Even so, output price inflation produced its highest reading in six months.

The surprising recovery in the headline PMI provides a little additional justification for yesterday's BoE interest rate hike but the details of today's survey hardly indicate a sector brimming with confidence. While pointing to a moderately decent start to the fourth quarter by the aggregate economy, there is certainly nothing here to suggest that another increase in rates is just around the corner.

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.