SERVICES PMIs
USA: Business activity expands at fastest pace since April 2015
October PMITM data signalled a strong expansion in business activity across the U.S. service sector. The quicker rate of growth was largely linked to more robust demand conditions, despite a slower upturn in new export business. Firms continued to work through backlogs accumulated during lockdown, but pressure on capacity eased and employment consequently rose at the softest pace for three months. Optimism about business levels in one year’s time improved to the strongest since April 2018 principally amid hopes of an end to the coronavirus disease 2019 (COVID-19) crisis and additional stimulus during the pandemic.
Meanwhile, inflationary pressures softened, with some noting greater efforts to boost sales through discounts and offers.
The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 56.9 in October, up from 54.6 in September and higher than the earlier released ‘flash’ estimate of 56.0. The improvement indicated that the rate of growth regained momentum at the start of the fourth quarter to the sharpest since April 2015. Greater output was often attributed to stronger demand conditions and a further uptick in new business.
October data indicated a steep upturn in new business at service providers, with the rate of expansion accelerating for the second month running. Some companies noted that looser coronavirus restrictions had encouraged sales. The pace of growth was the most marked since February 2019. That said, new export orders rose at a softer pace in October, as reimposed lockdown measures in key external markets dampened demand.
At the same time, cost burdens faced by service providers increased at a solid rate. Higher input prices were reportedly due to greater transportation and logistics costs, with many noting that drivers were in short supply. The rate of input price inflation was the softest since June, however.
Service sector firms partially passed on higher costs to clients through greater selling prices in October. The pace of charge inflation was solid overall but eased as many companies stated that efforts to drive sales had led to the offering of discounts and promotions.
Service sector firms also reported stronger optimism regarding a rise in activity over the coming year. The record survey improvement in optimism took confidence to the highest since April 2018, which reportedly stemmed from hopes of notably looser virus-related restrictions in one year’s time and additional stimulus.
Meanwhile, greater new order inflows encouraged companies to increase their workforce numbers in October. Employment growth nevertheless softened to a three-month low amid some reports of fewer requirements due to excess capacity.
In line with easing pressure on capacity, backlogs rose at only a marginal pace in October. The rate of accumulation was the slowest in the current four-month sequence of growth which began after lockdown restrictions eased in July.
The IHS Markit Composite PMI Output Index* posted 56.3 at the start of the fourth quarter, up from 54.3 in September and a 29-month high. The upturn was driven by the strongest increase in service sector business activity since April 2015 alongside a more modest acceleration of manufacturing growth to an 11-month high.
Contributing to output growth was the fastest rise in new business since February 2019. Manufacturers and service providers both registered quicker expansions. The improvement was driven by domestic demand, as new export orders almost stalled. Goods producers even recorded a renewed fall in export sales.
Amid emerging reports of spare capacity, private sector firms indicated a slower rise in employment in October. Job gains were the slowest since July thanks to softer rates of job creation in both manufacturing and services.
Companies were more upbeat regarding the outlook for output over the coming 12 months, with optimism surging by a survey record extent in October.
Meanwhile, rates of input price and output charges inflation eased in October. The rise in selling prices was solid overall but firms only partially passed on higher costs to clients.
Eurozone economy stagnates at start of fourth quarter
The eurozone’s private sector economy stagnated during October, as signalled by the IHS Markit Eurozone PMI® Composite Output Index posting a level of 50.0. Whilst an improvement on the earlier flash reading, the index was nonetheless down from 50.4 in September and ended a three-month period of growth.
In line with recent developments, the headline index masked the continuation of a two-speed economy in October. Manufacturing output growth was sustained, and to the strongest degree in over two-and-a-half years. In stark contrast, service sector activity contracted again, deteriorating to the greatest degree since May.
There was also a notable divergence in activity at the national level. Led by a resurgent manufacturing sector, Germany was the only nation to register an expansion in private sector activity, with growth here reaching a three-month high.
All other nations registered contractions in activity since the previous month with Spain registering by far the sharpest fall, followed by France. Italy and Ireland recorded marginal declines in activity.
For the first time in four months, levels of incoming new business declined as strong gains in manufacturing new work were more than offset by weakness in services. There was some positive news on export sales, however, which rose for a second successive month.
A twentieth successive monthly decline in backlogs of work outstanding was signalled during October, although the rate of contraction was marginal and the weakest since February. Nonetheless, firms were able to comfortably keep on top of their workloads despite another round of job losses. An eighth successive monthly decline in employment was registered during October, albeit to the weakest degree in the current sequence.
By country, job losses were recorded across all nations, with the sharpest reduction seen in Spain. The weakest decline was recorded in Germany.
A fifth successive monthly increase in input costs was indicated during October. Inflation was solid and the strongest recorded since February, with similarly-sized increases seen across manufacturing and services.
The challenging business environment continued, however, to weigh on company pricing power. Latest data showed that average output charges declined for an eighth successive month, albeit marginally and at the weakest rate in the current sequence of deflation.
Looking ahead to the coming 12 months, business confidence remained in positive territory during October but fell to its lowest level since May.
October’s IHS Markit Eurozone PMI® Services Business Activity Index fell to a level of 46.9. Down from 48.0 in the previous month, the latest index reading was the lowest recorded by the survey since May and indicated a second consecutive monthly decline in activity.
All countries registered a fall in service sector activity, albeit to varying degrees. Germany registered the weakest decline, with the rate of contraction marginal. In contrast, Spain recorded the sharpest rate of contraction for five months.
A third successive monthly decline in levels of incoming new business was registered during October, with the rate of contraction accelerating to the sharpest for five months. Both internal and external demand was down. New export business declined for a twenty-sixth month in a row, and at a considerable rate.
Employment numbers were cut for an eighth successive month in October, although the rate of contraction was modest. Job losses were recorded across the region, with the exception of Germany were modest growth was registered.
Mild cost pressures persisted during October, as indicated by a fifth successive monthly rise in input costs. In contrast, competitive pressures and the weak demand environment led to another round of price discounting amongst euro area service providers.
Finally, confidence about the future sunk to a five-month low. Sentiment deteriorated most notably since September in Italy, whilst French service providers where the least optimistic overall.
China: Business activity growth accelerates amid stronger client demand
Latest PMI data signalled a further acceleration in the rate of growth of business activity across China’s service sector at the start of the fourth quarter. Furthermore, the rate of expansion was the second-quickest for over a decade, driven by a substantial increase in total new work. However, the resurgence of coronavirus disease 2019 (COVID-19) cases across a number of export markets led to a quicker decline in new work from overseas. The strong improvement in overall demand conditions nonetheless led to a further rise in staffing levels, while confidence towards the year ahead strengthened to the highest level since April 2012.
The headline seasonally adjusted Business Activity Index rose from 54.8 in September to 56.8 at the start of the fourth quarter, to signal a substantial increase in service sector output. Notably, the rate of growth was the second-fastest since August 2010 (after June 2020). Business activity has now risen in each of the past six months, to signal a sustained recovery from the COVID-19 related drops in activity seen earlier in the year.
In line with the trend for business activity, services companies reported a sharp and accelerated rise in new orders during October.
Furthermore, the rate of increase was the third-steepest since September2010, with panel members linking the upturn to a sustained recovery of client demand and new product launches. However, the amount of new work from overseas clients dipped for the fourth month in a row amid reports that a resurgence of the virus across a number of export markets had dampened foreign sales.
Increased amounts of new work and signs of firmer market conditions led companies to add to their payroll numbers for the third month in a row in October. Though modest, the rate of job creation was the strongest recorded for just over a year.
At the same time, outstanding workloads rose only slightly, with the rate of accumulation having softened since September. According to panellists,capacity pressures stemmed from a sustained and strong rise in new order inflows.
Service providers in China signalled a stronger rise in operating expenses at the start of the fourth quarter amid reports of higher staff and purchasing costs. Notably, the rate of inflation was the steepest for just over two years and solid.
However, efforts to remain competitive led firms to raise their output prices only slightly, with the rate of increased little-changed from that seen in September.
Finally, the latest survey revealed a marked improvement in business confidence regarding the 12-month outlook for output. The degree of optimism was, in fact, the strongest recorded since April 2012. Forecasts for growth were supported by expectations of further improvements in customer demand and that global economic conditions will strengthen once the pandemic is under control.
China’s reduced exports to the U.S. due to the trade war have rapidly been more than offset by exports to other parts of the world:
Small Business Jobs Index Moderates as COVID-19 Cases Rise Throughout the U.S.
The Small Business Jobs Index provides insight into the small business employment trends driving the U.S. economy. Using aggregated payroll data from businesses with fewer than 50 workers, the index offers a monthly, up-to-date measure of change in small business employment.
- At 94.32, the Small Business Jobs Index slowed 0.13 percent in October and 3.89 percent from last year.
- Though the decrease was small, 0.13 percent, the national index reached a new low at 94.32 in October.
- Weekly hours worked growth remains positive at 0.38 percent, though one-month and three-month annualized growth both posted negative rates in October.
Saudis, Other OPEC Producers Consider Deeper Cuts Amid Pandemic The debate comes at a time when the Organization of the Petroleum Exporting Countries had hoped to be in a position to start turning oil production back on.
(…) Prices remain at about half the level that Saudi Arabia needs to balance its spending this year, according to the International Monetary Fund. Earlier Tuesday, the Saudi Arabia Oil Co., or Aramco, Saudi Arabia’s state-controlled oil company, said it would pay out its normal quarterly dividend of $18.75 billion, despite bringing in just $12.4 billion in cash during the period. (…)
Moscow is now open to keeping curbs in place after consulting Russian oil companies, according to one Russian oil official.
The United Arab Emirates, a crucial OPEC voice and typically a staunch Saudi ally, is still reluctant to delay restoring production after coming under pressure from the kingdom to comply with agreed cuts, according to the officials.
Xi Says Economy Can Double as China Lays Out Ambitious Plans
Chinese President Xi Jinping said the economy can double in size by 2035 and the country can reach high-income status in the next five years as the Communist Party outlined ambitious plans for the nation’s future. (…)
The Communist Party’s top decision makers released a broad framework for a five-year economic plan and 15-year vision last week, focusing on self-reliance in technology, boosting domestic consumption and pursuing quality growth over speed.
While the plan didn’t specify an explicit growth target, Xi’s ambition to double gross domestic product by 2035 would mean an annual growth rate of nearly 4.7%, said Hong Hao, chief strategist for Bocom International in Hong Kong.
China has the world’s second-largest economy, estimated at $14.3 trillion in current dollars by the World Bank. The Washington-based lender categorizes China as an upper middle-income economy with a per-capita income of $10,410. A high-income country is one with gross national income per capita of $12,375 or more. (…)
Xinhua also published more detailed proposals from the five-year plan, including:
- Promoting yuan internationalization in a “steady and prudent” manner
- Supporting Beijing, Shanghai and the Greater Bay area of Guangdong, Hong Kong and Macau as international technology innovation centers
- Boosting “strategic technologies.” The plan called to mobilize all the country’s resources to make breakthroughs in key technology development from artificial intelligence to quantum computing and semiconductor manufacturing
- Strengthening domestic oil and gas production while also promoting clean energy
Why Fewer Chips Say ‘Made in the U.S.A.’
In 1990, the U.S. and Europe produced more than three-quarters of the world’s semiconductors. Now, they produce less than a quarter. Japan, South Korea, Taiwan and China have risen to squeeze out the U.S. and Europe. And China is on pace to become the world’s largest chip producer by 2030.
The epicenter of chip production shifted partly because governments outside the U.S. offered often hefty financial incentives for factory construction to build up domestic industries. Chip companies also have been attracted by growing networks of suppliers outside of the U.S., and an expanding workforce of skilled engineers capable of operating expensive manufacturing machinery.
While manufacturing has left the U.S. in recent decades, many of the world’s largest chip companies are still U.S.-based. (…) As of 2019, the share of semiconductor sales by U.S.-based companies was around 47%. (…)
The raw materials that go into chip-making, including industrial chemicals and silicon crystals, also largely come from outside the U.S.
The U.S. has kept a larger slice of the industrial pie in some other fields of chip-making—especially in ubiquitous software tools used to design the layout of chip circuitry. (…)
The U.S. historically hasn’t offered federal incentives to chip-making, although states do provide a variety of enticements for factory-building, including subsidized land and tax breaks. In Asia, by contrast, countries typically offer free or cheap land, and give more help with purchasing manufacturing equipment that accounts for most of the cost of chip-making.
Ant IPO Halt Caps Backlash Against Ma The extraordinary move to suspend the $34 billion initial public offering of Ant Group, the online-finance operation carved out of Alibaba, caps a tug of war between billionaire Jack Ma and China’s top regulators.
(…) Mr. Ma’s criticism of regulators last week for stifling innovation appears to have brought his feud with the government to a head at a risky time for Ant. For Mr. Liu and his financial regulators, Ant’s business model represents big risks that must be reined in. When it halted Ant’s IPO on Tuesday, the Shanghai Stock Exchange said it was because of a “significant change” in the regulatory environment, without elaborating. (…)
The risk that Ant poses to the financial system is that it acts like a financial institution but isn’t regulated like one. Ant runs China’s ubiquitous payment app, Alipay, and facilitates investments for its customers’ savings, sells insurance and originates short-term loans. Ant provides just a small amount of the money it lends. The bulk of the funds come from more than 100 commercial banks that it has partnered with and from the sale of securities. Ant collects fees for facilitating the transactions.
However, that’s where regulators think the risks come in: Ant takes business away from traditional lenders and leaves them with the credit risk from both consumer and small-business loans. Big state-owned banks, traditionally a powerful lobbying force in China, also increasingly see Mr. Ma’s big-tech invention as a threat to their own businesses. They argue that Ant hasn’t been required to abide by the tough banking regulations on capital and leverage that they face. Under draft rules, Ant would be required to fund at least 30% of each loan it makes in conjunction with a bank or other financial institution. (…)
By making Ant more like a bank, regulators could stifle its growth, reduce its profitability and shrink the company’s valuation. Banks are typically valued much lower than tech companies. (…)
Bloomberg adds: “The group faces an even harsher crackdown as Chinese regulators will discourage lenders from using its credit platforms, people familiar said. The proposals would render many existing transactions non-compliant. Ant’s listing is seen delayed by at least half a year, QQ.com reported.”
Axios’ Felix Salmon: “Ant provides the technology that powers much of the Chinese economy, from borrowing to saving to investments to insurance. A failure of its systems could have devastating consequences for hundreds of millions of people.”