-Employment falls for first time in 10 months
-Companies may attempt to recover lost productivity
-Input charges rise at same pace as in August
-Business expectations edge up



The UK's dominant service sector expanded in September but undershot analysts' forecasts.

Experts said that now that results were in for the service, construction, and manufacturing sectors, it was 'touch and go' whether the UK economy would grow in the third quarter.

Markit's service sector Purchasing Managers Index (PMI) registered 52.2 - anything above 50 means the sector is expanding. Analysts had pencilled in a reading of 53.

September's figure was down from August's 53.7, but still clocked up its twenty-first successive month of growth.

The service sector is in better shape than both the construction and manufacturing sectors.

The UK construction sector PMI for September came in at 49.5, which was down on August and included a sharp fall in new business inflows.

The manufacturing sector posted a reading of 48.4 in September, also down on the month before.

Jobs lost

A solid increase in volumes of incoming new business supported the latest rise in activity within the services sector (to 53.1 from 52.3) but firms also recorded a net fall in employment for the first time in ten months (from 51.3 to 48.3).

Markit's research showed companies were adopting a cautious attitude when it came to employment decisions, generally choosing not to replace leavers.

Operating expenses continued to rise in September, although the pace of inflation remained little changed. The subindex measuring input prices edged down (to 56.3 from 56.4).

A number of companies continued to blame higher fuel and energy costs, while some commented on an increase in food prices.

These rises hit the hotels, restaurants and catering sector hardest, as it recorded the steepest input price rises.

Confidence rose to a four-month high, with many respondents anticipating an improvement in the performance of the UK economy. Thus, the business expectations index rose to 67 points (from 66.5).

Flat third quarter

Chris Williamson, Markit's Chief Economist, said the September service sector PMI added to evidence to suggest that the UK economy barely expanded in the third quarter.

"GDP is likely to have grown by perhaps 0.1% as modest growth of services activity was offset by a slight drop in construction sector output and a steeper decline in manufacturing, according to the PMIs," he said.

This compares with a prediction from the British Chambers of Commerce, which forecast growth of 0.5% in the third quarter.

Martin Beck, UK Economist at Capital Economics, was more downbeat, saying a weighted average of the three main activity balances of the manufacturing, construction and services surveys was consistent with flat GDP in the third quarter.

"Overall, then, it is looking like the rebound in the economy expected in the third quarter is struggling to get any oomph behind it," he said.

The latest figures from the Office for National Statistics show the UK economy contracted for three consecutive quarters between October 2011 and June 2012.

Somewhat more ominously perhaps, Blerina Uruci at Barclays Research writes that: "The fall in payroll numbers came as firms reported efforts to reduce overhead costs and staff levels as part of company reorganisations. The fall in the index suggests that, after months of puzzlingly strong employment figures, we could see payroll numbers fall as firms aim to restore productivity in the current challenging demand environment. As we have previously noted, much of the UK's puzzling productivity dip appears to lie in the services sector."

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