BackPrivate sector activity expands at a slower pace in July, but hiring remains lacklustre
Employment is a lagging indicator and it should start picking up when the turnaround picks up steam
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The HSBC Composite Purchasing Managers’ Index (PMI), a survey-based seasonally adjusted measure of economic activity in the private sector, expanded in July at a slightly slower pace than in the previous month. That is because while there has been a sharp pick-up in the manufacturing sector, activity in the services sector slowed down.
What is the likely trend in future? In manufacturing, the sub-index for new orders shows a strong rise in July, while the sub-index for the stock of finished goods went down a bit. That suggests firms will need to build stocks to service the new orders, which means higher future output. In the services sector, however, the sub-index for new orders is lower than in June. So far, however, hiring hasn’t really picked up. The employment sub-index for manufacturing was marginally in positive territory in May and June and contracted a bit in July. In the services sector, the employment sub-index was in negative territory in May and July and was only slightly positive in June. But then, employment is a lagging indicator and it should start picking up when the turnaround picks up steam.
So far, the pick-up in activity in the last few months has had a mixed effect on prices. Input prices have gone up for firms both in the manufacturing and service sectors, with the pace of expansion much faster in manufacturing. In July, the sub-index for manufacturing input prices was at a higher level than the long-term average. Interestingly, though, manufacturing firms were unable to pass on the higher input prices and the output price sub-index for manufacturing in July was lower than in May and June. That suggests manufacturing firms lack pricing power. But despite more muted expansion in activity, prices charged in the service sector firmed up in July.
These are early days in a cyclical upturn. Much depends on what happens to prices once the recovery gains momentum. As the RBI indicated in its monetary policy statement, it will not let down its guard.
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