Saturday, March 7, 2015

7/3/15: Irish Services Sector Activity & PMI: January 2015

Irish Services Activity Index for January came out yesterday, offering some interesting data reading.

Contextually: Services PMI has averaged 62.2 in the 3 months through February 2015 and it averaged 61.9 for the period of 3 months through November 2014 - both showing blistering growth in the sector.

Now, January Services Activity Index came in 12.6% ahead of the same level in January 2014. 2 mo average through January (comparative to PMI averages we have) is 119.6 which is 9.44% ahead of 3mo average through the same period of 2014. This is rapid growth and it accelerated in December-January as chart below shows.

The acceleration was broadly-based:

  • Information and Communication sub-sector activity rose 21.2% y/y with a massive 10.2% jump in m/m terms in January alone. The sub-sector growth rate is around 8.11% y/y in terms of 3mo average through January.
  • Professional, Scientific and Technical sub-sector activity posted a big 14.0% jump y/y in January and was up 11.8% m/m. 3mo average through January was up 13.1% y/y.
  • Wholesale and Retail Trade etc sub-sector activity rose 8.8% y/y and 9.5% m/m - also strong growth, although 3mo average through January was up weaker 7.2% y/y.
  • Transportation and Storage sub-sector activity rose 8.4% y/y but was down 1% m/m, having previously posted rapid growth in November and December. 3mo average through January 2015 is up 16.5% y/y.
  • Accommodation and Food services activity was up 14% y/y and down 0.33% m/m in January, with 3mo average through January 2015 standing 13.9% above 3mo average through January 2014.
  • Administrative and Support services activity rose only 2.9% y/y and was down 0.8% m/m, with 3mo through January 2015 up just 2.1% y/y.

So, in summary - January figures show a very surprising (and thus suspicious) jump in overall activity across a number of sectors. CSO provides no explanation as to this jump nor any warnings on it. My suspicion is that we are seeing the effects of the infamous 'knowledge development box' introduction in Budget 2015 with MNCs pushing forward more aggressive tax optimisation strategies through it, whilst maintaining previous tax arrangements. I will post a small note on this later, so stay tuned.

Now, an update of the validity of PMIs as a measure of Services Activity recorded in the sector. Table below shows correlations between Services Activity Indices and Services PMIs

As the table shows, there is very little relationship between Services PMIs performance (I also did same analysis for rates of change in the indices that show even worse performance for PMIs as indicators of current or future actual activity) and actual Services sector activity. Out of 84 correlations, 53 are either negative of statistically zero and only 13 have strong positive correlation with either levels of activity or growth in activity. Crucially, PMIs perform stronger (relatively speaking) in correlations with levels of activity, rather than growth rates in activity (in which they perform absolutely disastrously across all time horizons and lags). About the only areas where PMIs are useful in relating to the level of activity (but not growth in activity) are: strongly with ICT, weakly with Admin & Support services and overall Services. Which suggests strong bias in PMIs toward MNCs-dominated ICT services sub-sector. Another miserable point for PMIs: they are more indicative of contemporaneous activity than providing insight into future activity.

No comments: