Activity levels across Australia's all-important services sector are stabilising

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Activity levels across Australia’s massive services sector — the most economically important industry and largest employer in the country — stabilised in October, according to the latest Performance of Services Indicator (PSI) released by the Ai Group on Thursday.

The headline PSI rose 1.6 points to 50.5, leaving it fractionally above the 50 level that separates expansion from contraction.

The index measures changes in Australia’s services sector from one month to the next. A reading above 50 indicates that activity levels improved from a month earlier while a sub-50 figures says that they have deteriorated.

Essentially, the higher the number the better.

Breaking down the headline result, the Ai Group said that three of the survey’s five subindices expanded during the month.

“Employment lifted into positive territory, rising 8.6 points to 52.9, new orders fell 1.4 points to 52.3 points and sales dropped by 2.2 points to 51.1 points,” it said.

The sharp improvement in the employment index is welcome news, not only as the sector is the largest employer in the country but also because employment growth has slowed sharply over the course of the year.

The continued expansion in new orders — a lead indicator that has now grown for nine consecutive months — is also a good sign for activity levels moving forward.

Partially offsetting those readings, inventory levels and supplier deliveries both contracted, albeit at a slower pace than seen in September.

The Ai Group uses three-month moving averages for the survey’s subindices to help smooth out volatility in the readings.

Source: Ai Group

While, as a whole, activity levels improved across the sector, the improvement was narrow in scope with only four of the nine sub-sectors surveyed expanding during the month.

“Health and community services (down by 2.3 points to 53.6), personal and recreation services (down by 3.8 points to 53.3) and wholesale trade (down by 0.4 points to 52.1) all expanded in October but at a slower rate,” said the group.

“Finance and insurance improved by 2.2 points to be broadly stable over the month, at 50.3 points. Communication services (49.7 points) and property and business services (49.9 points) were also broadly stable in October.

“Retail trade (46.2 points), accommodation, cafes and restaurants (39.3 points) and transport and storage (37.9) continued to contract.”

The weakness in retail and accommodation, cafes and restaurants, at face value, is a worry, suggesting that the household consumption — the largest growth engine in the Australian economy — remains fragile, continuing the trend seen in Australia’s Q2 GDP report released earlier this year.

Despite the weakness in those crucial sectors, the Ai Group said that survey respondents said that “general business confidence improved and that some promotional campaigns had helped to increase new orders”.

“Negative factors over the past few months such as the Federal election and poor weather seem to have passed,” it noted.

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