GB: CIPS/PMI Services Index

Thu Apr 05 03:30:00 CDT 2018

Consensus Actual Previous
Level 54.0 51.7 54.5

UK services had a much weaker than expected March. The sector PMI weighed in at just 51.7, comfortably below the market consensus and its lowest outturn in some twenty months.

However, in line with the surprisingly steep fall already announced in the construction PMI (see yesterday's calendar entry), bad weather almost certainly had an important negative impact on the headline index. Consequently, its decline will overstate the extent of any underlying deceleration and April should see a rebound.

Still, new business also saw its worst performance in more than a year-and-a-half while employment growth was the slowest so far in 2018. That said, headcount seems to have been checked to some degree by difficulties in filling vacancies due to the tight labour market, a view supported by another increase in backlogs. Even so, while remaining optimistic, business confidence in the year ahead slipped to its lowest level since the middle of last year.

Importantly for the BoE, input cost inflation climbed to a 3-month high as stronger wage growth combined with higher raw material costs and utility bills. Output prices saw their steepest increase since last December.

Today's report will leave the BoE's MPC in something of a quandary. Outside of manufacturing, March does not look to have been a particularly good period for the UK economy but unusually heavy snowfall was clearly an issue and price pressures (crucially, wages) seem to be on the up. On balance, a May tightening still seems probable but this month's inflation and labour market reports now assume even more significance than usual.

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.