October data pointed to a marked improvement in growth momentum across the U.S. service sector. Business activity and incoming new work both expanded at the fastest pace for 11 months. The latest survey also revealed an upturn in confidence towards the year-ahead business outlook, with service providers reporting the strongest optimism since August 2015.
Input cost pressures meanwhile picked up from the 19-month low recorded in September, which contributed to a slightly faster rise in prices charged by service sector companies during October.
At 54.8, up from 52.3 in September, the seasonally adjusted Markit Flash U.S. Services PMI™ Business Activity Index signalled a robust expansion of service sector output in October. The latest reading was the highest since November 2015 and contrasted with the subdued growth patterns seen through the third quarter of 2016 (index at 51.5 on average).
Service providers noted that supportive domestic economic conditions and an improvement in clients’ willingness to spend had underpinned the latest upturn in business activity. Reflecting this, new order growth also accelerated for the first time in three months and was the fastest since November 2015. Some survey respondents commented on greater business optimism and a corresponding rise in investment spending among clients.
Higher levels of incoming new work resulted in a further rise in unfinished business at service sector companies during October. Although only modest, the rate of backlog accumulation was the joint-fastest recorded since April 2015.
Despite stronger business activity growth, service providers indicated that cautious staff hiring patterns persisted in October. Measured overall, job creation picked up only slightly from the three-and-a-half year low recorded in September. While some firms sought to boost their payroll numbers in response to rising workloads, there were also reports that efforts to reduce costs had led to the non-replacement of voluntary leavers.
Service sector companies reported a solid increase in their average cost burdens during October. The rate of input price inflation was the fastest since May, but still weaker than seen on average since the survey began in late-2009. At the same time, service providers recorded a moderate rise in their average prices charged, with the pace of inflation edging up to its strongest since November 2015.
Meanwhile, business optimism across the service economy picked up sharply during October, which resumed the general upward trend seen since the index hit a post-crisis low in June. The latest reading signalled the greatest degree of confidence about the 12-month business outlook since August 2015. Anecdotal evidence suggested that hopes of an improvement in U.S. economic conditions, alongside recent signs of a recovery in client spending, had contributed to an upturn in business confidence during October.
The seasonally adjusted Markit Flash U.S. Composite PMI Output Index registered 54.9 in October, up from 52.3 in September and above the 50.0 no-change value for the eighth month running. Moreover, the latest reading pointed to the sharpest expansion of private sector output since November 2015.
Stronger growth was recorded by both manufacturing firms and services companies in October. The latest upturn in manufacturing production (‘flash’ output index at 55.3) was slightly faster than the rate of activity growth seen across the service sector (‘flash’ index at 54.8).
Tim Moore, Senior Economist at IHS Markit:
The latest survey data reveal a decisive shift in growth momentum across the U.S. service sector, which mirrors the more robust manufacturing performance seen during October. Taken together, the ‘flash’ PMIs suggest that the economy is growing at an annualized rate of around 2% at the start of the fourth quarter.