US services providers continued to expand their business at a remarkable pace as the fourth quarter began. New orders saw strong growth, largely in line with September levels, despite signs of weakening international demand.
Business activity expectations rebounded after hitting a 23-month low in September, but businesses continued to slightly reduce employment levels due to uncertainty about future demand.
On the price front, companies raised their prices at the slowest pace in nearly four-and-a-half years, despite a sharp increase in input costs. The seasonally adjusted S&P Global US Services PMI® pointed to further strong growth in services output in October, falling slightly to 55.0 from 55.2 in September, marking 21-month continued growth.
The recent surge in activity coincided with a strong expansion in new businesses, as companies reported securing new customers and customers being willing to commit to new projects. New orders continued to rise for the sixth consecutive month, with growth rates in line with September. However, growth in new orders was much faster than that in overseas orders, where international demand showed marked weakness.
Business confidence rebounded in October, rising to its highest level since June, buoyed by hopes of improved conditions following the presidential election, as well as expectations that low interest rates will boost activity.
While new orders and business activity continued to increase, companies remain reluctant to expand employment levels, with employment falling for the third consecutive month. However, this decline was marginal, as some companies hired additional workers in part by filling vacancies. Despite recruitment restrictions, companies have been able to retain their employees.
Services PMI components and their economic importance
The Services PMI report (Services PMI) usually consists of several key components that provide insights into the state of the services sector. These components include:
Business activity: This component measures the level of business activity in the services sector during the reporting period. It reflects whether companies are experiencing growth, contraction or stability in their operations.
New orders: New orders refer to the demand for services in the market. An increase in new orders indicates increased demand, while a decline may indicate weaker demand.
Employment: The Employment component of the Services PMI report shows changes in the level of employment within the services sector. It indicates whether companies are hiring, laying off, or maintaining their workforce.
Work arrears: Work arrears represent the amount of unfinished work accumulated by service providers. A high level of arrears may indicate capacity constraints or increased demand.
Business Outlook: This component measures providers’ sentiment regarding future business conditions. A positive outlook can indicate confidence in future growth, while a negative outlook may indicate concerns about economic conditions.
Supplier deliveries: Supplier deliveries measure the speed at which services are delivered by suppliers to businesses. Slower deliveries may indicate supply chain disruptions or increased demand.
Composite PMI: The composite PMI combines the Services PMI and the Manufacturing PMI to provide a comprehensive overview of economic activity in both the services and manufacturing sectors.
Together, these components provide a detailed picture of the health and performance of the service sector, providing valuable insights into economic trends, business conditions and potential future developments. Analyzing these components helps businesses, policymakers, and investors make informed decisions based on the current state of the service industry.
Difference between PMI for services and manufacturing
The services PMI (services PMI) and the manufacturing PMI (manufacturing PMI) are both important indicators of economic health, but they focus on different sectors of the economy. Here are some of the key differences between the two:
Sector Focus:
- The Services PMI measures business activity in the services sector, which includes industries such as healthcare, finance, retail
- On the other hand, the manufacturing PMI focuses on the manufacturing sector, which involves the production of physical goods such as automobiles, machinery, and electronics.
Nature of output:
- The PMI in the services sector reflects the provision of intangible services, such as consulting, education, healthcare and tourism.
- The manufacturing PMI reflects the production of tangible goods in factories and facilities.
Differences in the supply chain:
- Manufacturing usually involves complex supply chains with raw materials, intermediate goods, and finished products. The manufacturing PMI often includes components such as supplier deliveries and inventories.
- Services are often delivered directly to consumers or other businesses, relying less on complex supply chains than manufacturing.
Factors affecting performance:
- The performance of the services sector is closely linked to consumer spending, business investment, and general economic sentiment.
- The performance of the manufacturing sector is influenced by factors such as global demand for goods.
Impact on the economy:
- The services sector tends to be more resilient during economic downturns, when demand for certain services such as healthcare and education remains relatively stable.
- Manufacturing is more cyclical and sensitive to changes in world trade, industrial production, and consumer demand for durable goods.
Employment Patterns:
- The services sector is often more labor-intensive than manufacturing, with a higher proportion of service jobs in many economies.
- Manufacturing tends to employ a smaller share of the workforce but can have significant multiplier effects on employment due to its impact on related industries and supply chains.
