Edge and Odds

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Edge and Odds

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CHINA COMPOSITE PMI POINTS TO MODERATE GROWTH

The latest set of Caixin China Composite PMI™ data (which covers both manufacturing and services) pointed to a further rise in Chinese business activity during August, with the rate of expansion little changed from that seen in July. This was shown by the Composite Output Index falling only fractionally from July’s 22-month high of 51.9 to 51.8 in August.

A further increase in total business activity was supported by moderate expansions of activity and output across the services and manufacturing sectors in August. The Caixin China General Services Business Activity Index rose from 51.7 to 52.1 in August. Although this showed that the rate of services activity growth picked up slightly from July, it remained moderate overall and slower than the series average. Meanwhile, manufacturers raised output for the second successive month, though the rate of expansion softened since July.

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Services companies partly linked higher business activity to new projects. As was the case for activity, however, the rate of new order growth remained subdued, and the pace of expansion edged down slightly to a three-month low. Goods producers also saw new business increase during August, though the rate of growth weakened to a marginal pace. As a result, composite new work increased at a slightly softer pace than in July, with growth remaining modest overall.

After a marginal reduction in July, service sector staff numbers stabilised during August. Some service providers mentioned hiring additional employees to help with new projects, while others indicated that the non-replacement of voluntary leavers had cut workforce numbers. Meanwhile, manufacturing payrolls declined at a pace that, though marked, was the slowest seen in 2016 to date. At the composite level, employment fell for the fifteenth successive month, albeit at a moderate pace.

August data pointed to a third successive monthly fall in the level of work-in-hand (but not yet completed) at services companies, while backlogs continued to rise at manufacturers. The rate of depletion across the service sector remained similar to those seen in the prior two months and only marginal. Meanwhile, the pace at which outstanding work increased at goods producers eased to a moderate pace. Overall, composite outstanding workloads rose only slightly in August.

Input prices rose across both monitored sectors during August, though the rates of inflation eased from the previous month in both cases. Service providers saw only a marginal rate of cost inflation that was the slowest since January 2015. Panellists indicated that lower costs for particular items such as diesel had reduced price pressures. At the same time, the rate at which input costs increased at manufacturers slowed to a moderate pace. Consequently, composite input prices rose modestly in the latest survey period.

Prices charged for both manufactured goods and services rose only slightly during August. This contrasted with a solid increase in charges set by manufacturers in July, while it was the weakest rate of charge inflation seen at services companies for five months. A number of monitored firms mentioned that selling prices rose in line with increased input costs.

Services companies continued to express optimism towards the 12-month business outlook in August. Furthermore, the degree of positive sentiment was the strongest seen in six months, albeit below the series historical average. Expectations of improving market conditions and new business developments were mentioned as key drivers of business confidence in the latest survey period.

U.S. SERVICES PMI WEAKENS TO 51.0

August data indicated that the U.S. service sector continued to struggle for momentum, with both business activity and incoming new work expanding at slightly slower rates than in the previous month.

This contributed to a moderation in job creation to its weakest since December 2014. Meanwhile, service providers are upbeat overall about the 12-month outlook for business activity, and the degree of positive sentiment remained comfortably above the survey-record low seen in June.

At 51.0 in August, the seasonally adjusted Markit final U.S. Services Business Activity Index dropped from 51.4 in July but remained above the 50.0 no-change value for the sixth consecutive month. The latest reading signalled only a marginal increase in business activity, and the pace of expansion was the weakest seen since the upturn began in March. Survey respondents noted that relatively subdued client demand and uncertainty ahead of the presidential election had acted as growth headwinds in August.

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Service providers reported a moderate rise in new business volumes in August, with the pace of expansion remaining weaker than the average seen since the survey began in late-2009. Subdued demand patterns resulted in a renewed slowdown in employment growth during August. The latest survey marked six-and-a-half years of sustained job creation, but the latest rise in payroll numbers was the weakest since the end of 2014.

Some firms noted that more cautious staff hiring policies had placed pressure on operating capacity in August. Reflecting this, backlogs of work increased for the second month running and at the most marked pace since April 2015.

The latest survey highlighted that business confidence across the service economy remained well above the survey-record low seen in June. However, the level of optimism was weaker than the post-crisis trend, which firms linked to heightened economic uncertainty and generally subdued client demand. Companies expecting a rise in activity over the next 12 months mainly cited new product launches and hopes of a rebound in business conditions after the presidential election.

On the prices front, August data pointed to another moderate rise in average cost burdens. The rate of inflation was little-changed since July and below the
survey average. Meanwhile, prices charged by service providers increased only marginally in August, which firms mainly attributed to strong competition for new work.

Adjusted for seasonal influences, the Markit final U.S. Composite PMI™ Output Index registered 51.5 in August, down slightly from 51.8 in July. The latest reading signalled a marginal expansion of private sector activity and was in line with the average recorded in 2016 so far.

Manufacturing production growth was unchanged from July’s eight-month high (index at 53.8), and the pace of expansion remained faster than that seen for services activity (51.0).

The composite index is based on original survey data from the Markit U.S. Services PMI and the Markit U.S. Manufacturing PMI.

Chris Williamson, Chief Economist at Markit said:

The weak PMI readings send a downbeat note on economic growth in the third quarter. Taken together, the manufacturing and services PMIs are pointing to an annualised GDP growth rate of a mere 1%, similar to the subdued pace signalled by the surveys throughout the year to date, suggesting that those looking for a strengthening in the rate of economic growth will be disappointed once again.

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