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Markit: US service sector activity increases in May

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Markit:  US service sector activity increases in May

However, the rate of expansion has slowed.

The widely-watch Markit Flash US Services PMI Business Activity Index released Wednesday signaled expansion in service sector output during May – but the rate of growth cooled during the month.

At 56.2 in May, the seasonally adjusted Index posted above the neutral 50.0 value for the nineteenth consecutive month. However, the latest reading was down from 57.4 in April and pointed to the slowest pace of expansion since the opening month of 2015. Mirroring the trend for business activity, service providers signaled the least marked upturn in new work for four months in May.

"Alongside the slowdown in manufacturing, the services PMI points to the weakest pace of US economic growth since January."

Service providers attributed higher levels of business activity to gradually improving economic conditions and rising client demand in May. That said, the latest survey suggested a lack of pressure on operating capacity, following the recent slowdown in new business growth. Volumes of work outstanding increased only marginally, with the rate of backlog accumulation the weakest since July 2014.

In contrast to the trends seen for business activity and new work, the latest survey highlighted an accelerated pace of service sector job hiring in May. Employment growth has now picked up for five consecutive months to the highest since June 2014. Anecdotal evidence attributed extra staff recruitment to new project wins, ongoing investment plans and confidence regarding the business outlook.

Service providers’ expectations for the year ahead picked up further from March’s eight-month low in May, with survey respondents generally citing hopes that economic conditions will improve in the months ahead. Meanwhile, service sector input price inflation was little-changed from the six-month high recorded in April. Companies that reported a rise in their average costs mostly attributed this to rising fuel prices. Despite a solid increase in cost burdens, prices charged by service providers rose only marginally in May, and at the slowest pace since January.

Commenting on the PMI data, Chris Williamson, Chief Economist at Markit said that “Slowing service sector growth adds to signs that the US economy has lost some momentum after an initial bounce-back from weather-related weakness at the start of the year.

“May’s PMI data showed service sector activity rising to a slightly smaller degree than signaled by the flash reading. Alongside the slowdown in manufacturing, the services PMI points to the weakest pace of US economic growth since January.

“While the survey still supports the view that GDP growth looks set to recover after the 0.7% rate of decline seen in the first quarter, the softness of the data raises big question marks for policymakers over the strength of the rebound and whether the economy is losing momentum as it heads into the summer.

“The strong dollar is clearly hurting, with new orders growth deteriorating in both manufacturing and services. On the other hand, order books growth remained strong enough to encourage firms to take on staff in increasing numbers in May, leading to the largest rise in employment for almost a year. With the job market gains pushing the economy towards full employment, policymakers may consider rate hikes appropriate even in the face of slower growth.”

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