Written By: Adrian Moore – Forex Focus
Key takeaways from the January PMI manufacturing and services surveys
Highlights of the January US PMI data:
Economic activity in the US manufacturing sector expanded to 59.1 in January, with the sector growing for the 105th month in a row, according to the Institute for Supply Management (ISM). The January numbers were, however, slightly below the seasonally adjusted 59.3 reported in December.
The key index parameter comprised of New Orders rose to 65.4 in January. However, the number was 2.0 percentage points below the December reading of 67.4. The Production Index expanded to 64.5, skidding by 0.7 percentage points from the previous month. The Employment Index registered the sharpest fall compared to the others, as the index dropped 3.9 percentage points to 54.2 in January from 58.1 in December. The Supplier Deliveries Index came in at 59.1, a 1.9-percentage point increase from the seasonally adjusted December reading of 57.2 percent. The Inventories Index rose to 52.3 in January, up 3.8 percentage points from the previous month’s figure of 48.5. The Prices Index, on the other hand, expanded to 72.7, treading up 4.4 percentage points from the previous month as prices of raw materials increased for the 23rd consecutive month.
Out of the 18 industries that comprise the manufacturing sector in the United States, 14 reported growth. Respondents were mostly upbeat on economic growth and business activity, with a number of them indicating that they intended to increase their CapEx (capital expenditure) outlay by as much as 40 percent compared to the previous year, on the back of lower tax rates and expectations of strong growth in 2018.
The ISM non-manufacturing sector in the US expanded by 3.9 percentage points to 59.9 in January from 56.0 in December, marking the 96th consecutive month of growth. The broad index was led by the New Orders Index, which registered a growth of 8.2 percentage points in January to 62.7 from a seasonally adjusted 54.5 in December. The Business Activity Index also rose to 59.8, two percentage points higher than the December number of 57.8 percent. The Employment Index spiked 5.3 percentage points to 61.6 from 56.3 reported in December. The Prices Index increased for the 23rd month in a row with a reading of 61.9.
Growth in the non-manufacturing sector rebounded in January after two consecutive months of drag, with 15 industries reporting growth and three contracting. Respondents were extremely positive about business conditions and the economy going ahead. In addition, the recent changes to the tax structure bode well for capital purchases, and companies expected strong growth in sales numbers, although they anticipated pricing pressures to have a negative effect on margins.
Highlights of the January eurozone PMI data:
Shifting focus to the eurozone, the IHS Markit Eurozone Manufacturing PMI came in at a three-month low of 59.6 in January, off from the record high of 60.6 reported in December of last year. Sector-wise data showed robust expansion in intermediate and investment goods, with growth in the consumer-goods sector accelerating as well, leading to an expansion in the manufacturing sector for the 55th straight month.
According to Markit economics, the top five countries in terms of their Manufacturing PMIs are highlighted below:
- Netherlands 62.5
- Austria 61.3
- Germany 61.1
- Italy 59.0
- France 58.4
While growth in the Netherlands rose to a series high, Italy reported the highest PMI in 83 years. On the other hand, the PMI numbers in Germany and Austria were near record highs. Business confidence was led by expansion in production and new orders, with all countries in the zone barring Germany reporting record-shattering confidence numbers. The other highlights include growth in new export business, expansion in manufacturing employment for the 41st successive month and rises in both input and output prices.
Meanwhile, the January IHS Markit non-manufacturing PMI in the eurozone was at 58.0, close to a 10-year high and 1.4 percentage points higher than the December number of 56.6. Business activity in the service sector expanded at its fastest pace on the back of strong output growth and expansion in new businesses, with the headline numbers in Germany and France at their highest since 2011. The sharp growth in new businesses in the eurozone rose at the quickest pace in more than a decade, increasing pressure on spare capacity, leading to backlogs. On the positive side, the rise in new orders coupled with increasing inventories of backlogs led to firms employing additional manpower, strengthening the labour market and leading to the largest increase in new jobs in more than a decade.
Inflation remained uneven across the eurozone, with input inflation rising close to an eight-year high on the back of steep rises in Germany, France and Spain, while output inflation rose to a nine-and-a-half year high and was more spread out across the countries in the eurozone.
Optimism among respondent companies was at its highest level since May of last year and at its second highest in nearly seven years.
Highlights of the January UK PMI data:
January Manufacturing PMI in the United Kingdom slipped 0.9 percentage points to 55.3 from 56.2 in December, led by easing growth in output and new orders, according to the survey by IHS Markit/CIPS. Although manufacturing output continued to remain in the expansion zone, the pace of growth declined to a six-month low. Likewise, the pace of increase in new orders slowed to a seven-month low, and with the two individual indices contributing more than 50 percent to the overall numbers in the broader index, Manufacturing PMI experienced its second successive monthly decline and its lowest level since June of last year, after expanding to a 51-month high in November. However, new export orders bucked the trend and strengthened to a four-year high, causing massive price pressures due to shortages in raw materials, leading input prices to accelerate at the quickest pace in 11 months and output costs to rise at the fastest pace since April of last year.
According to Rob Dobson, director at IHS Markit, “The UK manufacturing sector reported an unwelcome combination of slower growth and rising prices at the start of 2018. The trend in demand will need to strengthen in the near-term to prevent further growth momentum being lost in the coming months.”
Respondents in the manufacturing sector were overwhelmingly optimistic, with more than half of them forecasting production levels to rise in the next year on the back of global economic expansion, market conditions, export opportunities and planned product launches.
The IHS Markit/CIPS UK Services PMI slipped to 53.0 in the first month of 2018 from 54.2 in December, as output expanded at its slowest pace since September 2016 and growth in new orders fell below the 2017 average. The business-activity index reported the slowest growth in the last 16 months as concerns over UK’s exit from the European Union led to a fall in existing customers, contributing to a decline in acquisitions and sales. However, new business inflows expanded at a faster pace in January, leading to a sustained rise in employment to a four-month high. The decline in PMI numbers failed to dampen business confidence, with firms extremely optimistic that business activity will pick up during the course of the year, driving the confidence indicator to a 10-month high. Input costs were seen treading higher on the back of a price rise in insurance, transport fuel and food, while companies raised selling prices to protect margins.
According to Chris Williamson, chief business economist at IHS Markit, “The pace of UK economic growth slowed sharply at the start of the year as January saw a triple whammy of weaker PMI surveys. The softer service sector growth follows news of the manufacturing upturn losing momentum at the start of the year and a near-stagnant construction sector. While the fourth quarter PMI readings were historically consistent with the economy growing at a resilient quarterly rate of 0.4-0.5%, in line with the recent GDP estimate, the January number signals a growth rate of just under 0.3%. The January slowdown pushes the all-sector PMI into dovish territory as far as Bank of England monetary policy is concerned, historically consistent with a loosening bias. With the survey also indicating weaker upward price pressures, the data therefore cast doubts on any imminent rise in interest rates.”