Services Economy Seen Recovering Handily in October

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Of the barrage of economic reports issued this week, none will be more dominant in the media that the first look at third-quarter gross domestic product (GDP) due on Friday morning. That being said, economists, investors and business managers are considering other economic reports ahead of the GDP report in an effort to see what they should really be looking for in GDP.

Among this week’s economic data already reported, the PMI Manufacturing Index flash reading rose unexpectedly and beat the consensus estimates handily. That was an October reading, which is after the end of the third quarter, but it did include retroactive views.

Now we have a look at the PMI Services Flash reading coming in for October, which is above the September reading. This report is also from IHS Markit and came to 54.8 in October, compared with 51.9 in September. Note that this was the strongest reading of 2016.

According to the Services PMI reading, business activity increased at a robust and accelerated pace in October. Also noted was that new order volumes rose at the quickest rate so far in 2016 and was the strongest business optimism since August 2015.

New order growth was shown to have accelerated for the first time in three months, with survey respondents seeing greater business optimism and seeing a rise in investment spending among clients.

There was also some pressure on inflation here among services providers. The IHS Markit report indicated a solid increase in cost burdens during October. Input price inflation was shown to be the fastest since May, although this is still weaker than average going back to the survey’s first report back in late 2009. Service providers also indicated that they saw a moderate rise in their average prices charged. That means their prices received was up, with price inflation edging up to its strongest since November 2015.

Business optimism also picked up sharply across the service economy. This now has resumed an upward trend seen since the index hit a post-crisis low in June. It was also the largest degree of confidence about the 12-month business outlook since August 2015.

The report was stronger in general, but IHS Market was cautious on the employment portion of this report. It said of October:

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.

Wednesday’s services report is from a panel of over 400 companies based in the U.S. services sector.

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