Edge and Odds

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Edge and Odds

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Month: May 2016

CHINA SERVICES PMI DECLINES TO 51.8

Caixin China Composite PMI™ data (which covers both manufacturing and services) indicated a second successive monthly expansion of overall business activity in China during April. That said, the rate of activity growth eased since March to signal only a marginal rate of increase, with the composite index posting 50.8, down from 51.3.

April data indicated that growth of Chinese business activity continued to be led by the service sector, as output broadly stagnated at manufacturers. That said, the rate of services activity growth slowed slightly since March, with the Caixin China General Services Business Activity Index posting 51.8 in April, down from 52.2 in March. Moreover, this indicated that the pace of service sector expansion remained modest overall, and slower than the historical series average.

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Despite softer growth in activity, service providers reported a faster rise in new orders in April. Furthermore, the rate of new order growth was the strongest seen in three months, with some firms commenting on improved underlying client demand and new product launches. At the same time, goods producers in China signalled no change to their new order books in April, following a slight increase in the previous month. Overall, new business at the composite level expanded modestly for the second month in a row.

The modest rebound in new order growth led services companies to raise their staff numbers in April. Though the rate of payroll expansion was marginal, it contrasted with a slight reduction in employment in the previous month. Meanwhile, manufacturers continued to reduce their staffing levels at the start of the second quarter. Furthermore, the rate of job shedding was only fractionally slower than February’s post-global financial crisis record. Consequently, composite employment fell further in April, albeit at a softer pace than March’s seven-year peak.

The amount of outstanding business at Chinese service providers increased for the first time in 2016 so far in April, albeit only slightly. Reports from panellists indicated that improved inflows of new work contributed to renewed capacity pressures and higher unfinished workloads. The level of work-in-hand (but not yet completed) also rose marginally across the manufacturing sector in April.

Average input costs continued their upward trend at service providers, with the rate of inflation picking up slightly in April. That said, the rate of increase remained modest overall and much slower than the series average. Goods producers meanwhile reported the fastest rise in cost burdens since the start of 2013, amid reports of higher raw material prices. As a result, composite input costs increased at the quickest pace since February 2013.

Sustained cost inflation contributed to a renewed rise in prices charged by service providers in April. However, the rate of charge inflation was only marginal. Anecdotal evidence suggested that increased competitive pressures across the service sector had restricted overall pricing power. Manufacturing companies meanwhile raised their charges solidly in April. At the composite level, average tariffs rose at the quickest rate since October 2011.

Overall business sentiment remained unchanged from March’s three-month low in April. Anecdotal evidence suggested that some companies expect improving market conditions, are planning operational expansions and are forecasting new projects to boost activity. However, other businesses commented that relatively subdued market conditions could dampen growth.

U.S. SERVICES PMI AT 52.8 ON MODEST NEW ORDERS GROWTH

April data highlighted a sustained recovery in overall business conditions across the U.S. service sector, led by faster growth of activity and incoming new work. However, the rate of job creation slipped down to its weakest so far in 2016 amid a lack of pressure on operating capacity and subdued confidence regarding the business outlook. At the same time, squeezed pricing power remained evident in April, with average tariffs broadly unchanged despite input cost inflation accelerating to its fastest since August 2015.

At 52.8 in April, up from 51.3 in March, the seasonally adjusted final Markit U.S. Services Business Activity Index remained above the neutral 50.0 value for the second month running. The latest reading was the highest since January and signalled a moderate expansion of service sector business activity. While the rate of output growth exceeded the average seen in the first quarter of 2016 (51.4), the headline index remained weaker than its post-crisis trend (55.6).

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The final seasonally adjusted Markit U.S. Composite PMI™ Output Index picked up to 52.4 in April, from 51.3 in March, thereby signalling the fastest expansion of private sector output since January.

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Stronger growth of service sector business activity (index at 52.8, up from 51.3 in March) contrasted with the weakest increase in U.S. manufacturing production for just over five-and-a-half years (index at 50.3 in April, down from 51.2).

Service providers mainly attributed the recent recovery in business activity to gradually improving client demand during April. Reflecting this, latest data indicated a modest rebound in new business growth from the survey-record low recorded in March. Anecdotal evidence suggested that uncertainty about the economic outlook was a key factor weighing on new order books at the start of the second quarter.

The latest survey highlighted that business confidence across the service economy was up fractionally in comparison to March, but still close to the lowest seen since the survey began in October 2009. Some survey respondents suggested that the presidential election season and heightened economic uncertainty had dampened the near-term growth outlook for their business units.

In contrast to the trend recorded for business activity and new work, the latest survey pointed to softer job creation at service sector companies. Moreover, the rate of employment growth was the weakest seen since December 2015. A slower rise in payroll numbers partly reflected an ongoing lack of pressure on operating capacity. Backlogs of work declined for the ninth consecutive month, which is the longest continuous period of depletion since the survey began in late-2009.

Service providers registered a renewed acceleration in input price inflation during April. Although only modest, the latest increase in average cost burdens was the fastest for eight months. However, average prices charged by service firms were broadly unchanged in April, which suggested further pressure on operating margins across the sector.

Commenting on the PMI data, Chris Williamson, Chief Economist at Markit said

The surveys are consistent with economic growth picking up from the 0.5% seen in the first quarter to a mere 1.0% at the start of the second quarter, suggesting the bounce-back from the weak start to the year is far from impressive.

The fragility of growth is highlighted by inflows of new business rising at a rate only marginally above the post-recession low seen in March, and optimism about the year ahead also remains close to a post-recession low.

The drop in confidence seen so far this year is beginning to hit the labour market, with the survey signalling 160,000 extra jobs being created in April, down from an average of 200,000 in the first three months of the year.