Service sector soars on both sides of pond

Julian Harris
Follow Julian
BOOMS in service sector activity were recorded in both the UK and the US last month, data revealed yesterday.

After a snow-affected dip in December, Britain’s largest sector hit an eight-month high in January, jumping to 54.5 in the latest purchasing managers’ index (PMI) from 49.7 in December, well above the 51.4 reading expected.

All figures over 50 point to industry growth. However, inflation also surged with the input cost index, accounting for companies’ costs and the prices they charge, leaping to 65.8 from 60.5, the biggest jump since the survey began in 1996.

And the US service sector also grew in January, at its fastest pace since August 2005 – up to 59.4 from 57.1 in December – according to the widely respected Institute for Supply Management (ISM) index.

The American uptick was broadly based with accelerated growth in business activity (64.6), new orders (64.9), and employment (54.5).

The British data also revealed underlying strength, with incoming new business increasing from 49.3 to 54.3 – its steepest pace since April 2010. Incoming new work has now risen in eighteen of the last nineteen months.

Economists said the data piled further doubt on the recent GDP statistics, which showed a contraction in the UK economy for the final three months of 2010.

Yet the Office for National Statistics should still publish preliminary estimates, according to Michael Saunders of Citigroup.

“They could publish perfectly accurate GDP data a year after the event, but that wouldn’t be very useful,” he said.


I suspect it will be revised. Irrespective of the snow towards the end of the year, we’re concerned about services data for October and November, which was out of kilter with other surveys. In October services were judged to have dropped 0.6 per cent, yet the PMI for that month hit 53.2.

When the government releases the first estimate, there is very little data for the final month of the quarter – and when that month is an oddity, perhaps because of weather effects, it can give us a misleading reading. The real story is that manufacturing is doing very well, and services are going along ok.

Yesterday’s PMI figures tell us that either the last GDP figures for the end of 2010 will be revised, or, if the economy did indeed contract, then it is bouncing back in the first quarter of this year. We publish GDP estimates sooner than any other G7 country, so users to have be careful how they interpret them.