Realist, not conformist analysis of the latest financial, business and political news

UK Services PMI Bounces – That Economy Out There Is Doing Just Fine

There are any number of economic statistics out there for us to take note of. Some of them are usefully important – an inflation rate of 50% a month is a signal of something we might want to take note of – and some of them aren’t – inequality before the interaction of the tax and benefits system is useless as a policy guide. One that is useful is the series of varied purchasing manager indices. One of those for the UK has just bounced upwards and that is a useful little signal.

Better weather and increased demand for financial services boosted UK services in June, with activity growing at its fastest rate since October 2017, a survey of businesses reported on Wednesday.

The IHS Markit services purchasing managers’ index rose to 55.1 in June, up from 54 in May. Analysts had expected the index to remain steady at 54.

This isn’t run for the hills stuff and it’s not a pop the champagne indication either. It’s just evidence that the economy carries on expanding nicely – we’re all getting richer that is.

The UK services sector reported its fastest rise in activity since last October, increasing expectations of an imminent interest rate rise.

The purchasing managers’ index (PMI) from IHS Markit/CIPS showed activity rose to 55.1 in June, up from 54.

IHS chief business economist Chris Williamson said the reading added to signs that the economy rebounded in the second quarter.

The way the index is constructed means that a reading of less than 50 shows economic contraction, one of over 50 expansion. Readings of over 60 aren’t really recorded – they’re too unusual.

Evidence that the UK economy has bounced back from a soft patch in the opening months of 2018 has emerged after a closely watched survey of the services sector showed stronger than expected activity last month.

As to what that survey is. We’d all like to know what is going to happen. And one group of people who know more than most is that of purchasing managers. Logically enough, if output is going to be higher in the future then someone, somewhere, has to be getting the stuff together today out of which we’ll make that higher future output. Those people are purchasing managers. So, go ask them – you buying more stuff to make more stuff from then? Build a network of such, ask them every month, you’ve got your PMI.

As to how effective it is, well, nothing’s perfect. But PMIs have proven themselves to be among the best of the leading economic indicators we have.

Finally, we’ve two of them for any specific economy, services and manufacturing. Services are some 80% of the UK economy so, obviously, the services one is more important. Except, well, manufacturing is only 10% of the economy but it’s also much more volatile. Thus the manufacturing PMI can tell us more about turning points. Can note, not will.

Finally finally, one more thing. It’s new information that is important, not old. Old information is, as the efficient market hypothesis insists, already in prices. If the PMI had been at 54, just where people expected it, then there would be no policy implications. It’s above that, the expansion is not just continuing, it’s doing so faster than people thought.

Nice economic news that, even if a minor variation in just the one short term indicator isn’t really all that important.

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5 years ago

I guess everyone isn’t shunning Britain because of Brexit after all! The refresher course is always welcome. One quibble: “inequality before the interaction of the tax and benefits system is useless as a policy guide” — Yes, as always, measuring misery without factoring in the national programs to alleviate misery doesn’t measure anything. But doing so might tell us whether the programs still need to be so massive.

5 years ago

Since the Brexit vote we’ve had wonderful summers, Andy Murray world number 1 tennis champion, England highest in the world cup since 1990.

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