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U.S. FLASH SERVICES PMI DROPS SHARPLY TO 49.8

U.S. service providers indicated that overall business activity declined slightly in February, thereby ending a 27-month period of sustained growth. At 49.8, the seasonally adjusted Markit Flash U.S. Services PMI™ Business Activity Index was down sharply from 53.2 in January, but only fractionally below the crucial 50.0 no-change threshold.

The index – which is based on approximately 85% of usual monthly replies – signalled the weakest service sector performance since the government shutdown temporarily disrupted business activity in October 2013. Reports from survey respondents suggested that softer underlying new order growth and uncertainty about the economic outlook had weighed on business activity in February. At the same time, disruptions related to heavy snowfall on the east coast were also a factor weighing on the headline index during the latest survey period.

New business growth moderated for the third month running in February. Moreover, the latest upturn in new work was one of the slowest since the survey began in late-2009. Service providers noted that some clients were more reluctant to commit to new projects, in part reflecting uncertainty about the economic outlook. This in turn led to the fastest reduction in backlogs of work since April 2014.

Looking ahead, service providers remain optimistic about the outlook for business activity over the next 12 months. However, latest data indicated that the degree of confidence dropped since January and was the lowest recorded for five-and-a-half years. Weaker business sentiment and softer new order growth did not prevent a further upturn in payroll numbers in February. Moreover, the rate of staff hiring was little-changed since January and above the average seen since the jobs recovery began six years ago.

On the prices front, the latest survey indicated only a moderate pace of cost inflation at service sector companies. A number of firms noted that lower fuel prices had helped to alleviate cost pressures at their business units. Meanwhile, service sector charges increased only fractionally in February and the rate of inflation slipped to a five-month low.

The seasonally adjusted Markit Flash U.S. Composite PMI Output Index posted 50.1 in February, down from 53.2 in January and the lowest since October 2013. As a result, the latest reading signalled that overall U.S. private sector business activity stalled in February, following a relatively subdued growth outturn at the start of 2016.

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