IN: PMI Services Index

Mon Dec 04 23:00:00 CST 2017

Actual Previous
Level 48.5 51.7

The Nikkei PMI survey for India's services sector indicates that the sector contracted in November, with the headline business activity index dropping to 48.5 from 51.7 in October. This index also signalled contraction in July and August after the introduction of the government's new goods and services tax, but after indicating modest expansion in September and October the survey again shows that firms are facing pressure from weaker demand. In contrast, the headline index for the Nikkei Manufacturing PMI survey, published last week, rose from 50.3 in October to 52.6 in November, its highest level in just over a year. Together, these moves resulted in the composite index falling from 51.3 in October t0 50.3 in November.

The drop in the service sector headline index reflected weaker new orders, which the survey indicates fell modestly in November. The manufacturing survey showed new orders grew more strongly in November. The two surveys also showed divergent trends in employment, with service sector payrolls reported to have risen at a slower pace, but manufacturers reporting jobs were added at the fastest pace since 2012. Nevertheless, service sector firms appear to expect the current weakness in demand to be short-lived, with the survey's measure of business confidence increasing.

Both surveys showed price pressures continued to build in November. Service sector respondents reported input costs grew at their fastest pace since late 2013 and that they had increased their selling prices at the fastest pace since July. Manufacturers reported that their input costs grew at the fastest pace since April but that competitive pressures made it difficult to pass on these higher costs, with only a "marginal" increase in selling prices.

Together, the PMI surveys for November again show mixed performance between the two sectors. In October, conditions improved in the services sector and weakened in the manufacturing sector, but this reversed in November, suggesting that the new goods and services tax is having an uneven impact on economic conditions. Respondents noted that the improved conditions in the manufacturing sector partly reflected changes to the sales tax rate applied to some products.

Nevertheless, despite the dip in the headline index in November, service sector firms remain confident about the twelve-month outlook, suggesting that officials at the Reserve Bank of India will not be unduly alarmed about the growth outlook. Instead, the increase in price pressures shown in both surveys suggest that the inflation outlook will remain the key focus at the RBI's policy meeting later in the week.

The Services Purchasing Managers' Index (PMI) is a joint publication by Markit and the Nikkei media organisation and provides an estimate of business activity in private sector services for the previous month by using information obtained from a representative sector survey incorporating around 800 companies. 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).

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 Markit PMIs, 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 survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators the report shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the diffusion index. This index is the sum of the positive responses plus a half of those responding the same.

The Purchasing Managers' Index (PMI) survey methodology has developed an outstanding reputation for providing the most up-to-date possible indication of what is really happening in the private sector economy by tracking variables such as sales, employment, inventories and prices. The indices 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.