Macro European indicators influence restaurant companies' sales

Part 8

Why rising managers’ sentiment points to higher European sales

The importance of service PMI

The service purchasing managers’ index is another useful indicator that illustrates how the overall restaurant industry is performing. The index captures the sentiment surrounding the service industry’s business activity and is released by Markit (a financial information service company that provides independent data) just a few days following the end of the respective month. The September report is expected to be released on October 3. Its timeliness is one of the reasons why it’s widely watched by money managers, analysts, and traders.

Service Purchasing Managers' Index 2013-09-14Enlarge Graph

History and background on the PMI

PMI data for the Eurozone and United Kingdom started to rise towards the end of 2008, as governments increased monetary and fiscal stimulus to halt a global economic meltdown. Figures for Eurozone members began slipping in early 2011, as the sovereign debt crisis started to negatively impact the service industry. Eventually, it went into contraction. While the United Kingdom saw an overall expansion, it nonetheless was bumpy.

Interpretation of the PMI

Unlike the retail trade data that’s based on hard numbers, the PMI is collected in a similar way to the consumer confidence index. A survey is distributed to managers of service shops to ask whether business is better than, the same as, or worse than the previous months. A figure of 50 means “the same,” 100 means “better,” and 0 means “worse.” Each respondent’s answer is compiled using arithmetic average. So figures above 50 often show that the economy is expanding, while those below 50 suggest business is contracting. The farther the figures are from 50, the stronger the rate of expansion and contraction.

Investors should note that fluctuations in the PMI—say, a drop from 55 to 53—can negatively impact the sales or share prices of restaurant companies in the short term. Whether the long-term prospects of the service industry and the restaurant industry itself will be negatively affected depends on the situation. As long as figures maintain above 50, they’re often seen as a positive for the long-term outlook of McDoanld’s Corp. (MCD) and Yum! Brand Inc. (YUM).

PMI has been turning around

Similar to several macro indicators we’ve seen, the service purchasing managers’ index appears to be showing signs of a turnaround. The PMI for Europe as a whole stopped falling after hitting 46 in mid-2012 and has since edged upward, reaching 51 as of August 2013. We”re also seeing some strength in the United Kingdom, with its PMI rising from 50 to 60 within a year. We haven’t seen such a large increase since 2009.

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