Two directions in one survey
In the July survey the composite measure rose 0.1 point to 54.1 per cent. Beneath that calm headline two lines moved in opposite directions: the prices index rose 2.6 points to 70.3 per cent while the employment index fell 3.8 points to 47.4 per cent. Business activity at 59.1 per cent and new orders at 57.2 per cent stayed in expansion.[1]
It is worth saying at the outset what this measure counts and what it does not. A diffusion index measures the share of firms adding staff against the share cutting it, rather than the number of employees. A reading of 47.4 per cent gives no figure for lost jobs; it says more firms cut staff than added. The honest claim available here is therefore about the direction of hiring decisions. How many households lost income cannot be read from this survey.[1]
Where does the cost get written down?
The respondent comments name the source of the cost. The transportation firm says pricing continues to rise, driven mainly by fuel and labour costs; the construction firm says sales continue to slide despite discounts, with cost pressure arriving from all fronts. Firms are carrying the input cost and the wage line at once, and the prices index has now broken the 70 per cent threshold for the fourth time in five months.[1]
When a firm can pass its input cost into price and still cuts staff, the adjustment shows up first in the hiring decision and only later in the margin. The number of people being paid a wage is trimmed faster than the number of households paying the price. This reading has an alternative: the employment index is a volatile series and a single month's move can be seasonal. The distinguishing observation is whether next month's survey brings the employment index back to the 50 threshold while the prices index stays above 70 per cent.[1]