Strongest Rise in US Business Activity for 5 Months Signalled in August

Michelle Remo, “Big 4″ observer
September 07, 2012 /

A solid expansion of UK service sector activity was signalled in August as companies benefited from a further rise in incoming new business and continued to make inroads into unfinished work.

Capacity was further increased as positive expectations were retained by a significant proportion of service providers. However, amid evidence that the operating environment remains challenging, sales and activity
continue to grow at below par rates, while confidence was again well below its historical trend level.

The headline seasonally adjusted Business Activity Index was comfortably above the 50.0 no-change mark in August. Posting 53.7 and rising from July’s 51.0, the index signalled a twentieth consecutive month of growth and its best reading since March.

Chris Williamson, Chief Economist at survey compilers Markit: “With the service sector upturn accompanied by a marked easing in the manufacturing sector downturn, the survey data add to hopes that the economy will pull out of recession following the 0.5% contraction seen in the second quarter.

“The wild card remains construction, for which the survey data indicated falling activity in August, which could subdue any recovery in the wider economy.

“The big question is whether the expansion can be sustained. It is concerning that the upturn in activity was not matched by a similar rise in hiring, with employment in the service sector instead growing at the slowest pace since February, and business expectations for the year ahead remaining very low by historical standards. It therefore looks like companies are expecting trading conditions to remain very tough in the coming months, meaning any economic growth after the third quarter rebound is likely to be lacklustre at best unless
demand picks up meaningfully in the autumn.”

Higher activity was attributed by panellists to a combination of new contract wins, marketing and, in some instances, better weather. New business volumes continued to rise, also for a twentieth month in a row, as a number of companies were able to convert pipeline business into hard contracts.

The survey also provided some anecdotal insight into the impact on business of the Olympics held in London during late July and early August. On the one hand, some panellists reported a positive impact on activity.

However, others suggested that the Games had impaired growth either via travel restrictions in and around London or business generally being put on hold during the period of the Games.

With activity and new business both registering net gains in August, a number of service providers were suitably encouraged to expand capacity at their units. Staffing levels increased for a ninth successive month, albeit at a modest pace that was the slowest since February.

An increase in available resources and a firmer rise in activity helped respondents keep on top of existing workloads. Backlogs of work were down for a fourth successive month in August.

Amid reports of a return to rising fuel costs and an increase in prices paid for energy, food and supplier
goods in general, a marked increase in overall operating costs was signalled by August’s survey.

With input price inflation accelerating to a fourmonth high, a marginal increase in output charges
was recorded – the first inflation recorded since April.

Finally, UK service providers remain on the whole confident of registering an increase in business activity over the coming 12 months. Market conditions are expected to improve, with demand supported by new product launches and pipeline business converted into hard contract wins.

Despite rising to a three-month high, worries with regard to the underlying strength of the economy ensured
that confidence remained below its long-term trend level in the latest survey period.

David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply: “The service sector’s performance in August is a welcome tonic to toast the end of summer and will undoubtedly provide some cheer for the UK economy, but we can’t afford to get carried away. Growth in August reflects in part a reaction to the temporary factors that impacted the industry in July and the overall economic picture remains incredibly

“Businesses have seen their profitability deteriorate over the summer due to increased costs. To protect
margins, some businesses have pushed up their fees having implemented price freezes or discounting, which are no longer feasible. As a consequence, confidence has improved somewhat, but concerns over the economy at large ensure it remains historically subdued.

“The Olympics resulted in mixed fortunes for the sector with some impacted negatively by travel restrictions and business being placed ‘on hold’. Others have reported higher levels of activity courtesy of new contract wins, marketing initiatives paying off and in some cases better weather.”


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