Australia just received another ugly reading on the state of household finances

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Australia’s services sector, arguably the most important in the country, is starting to slow.

And it’s being lead by a concerning trend in consumer-orientated sectors.

The latest Performance of Services Index (PSI) released by the Ai Group fell 0.9 points to 52.1 in September, moving it further away from the nine-year high of 56.4 struck two months earlier.

The PSI measures changes in activity levels across Australia’s services sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating.

The distance away from 50 indicates how quickly activity levels are expanding or contracting.

That means that at 52.1, activity levels still improved last month, just at a slower pace than August.

Activity levels have now improved in each of the past five months, the longest stretch seen since before the global financial crisis.

Like the headline PSI, the Ai Group said that all five activity subindices improved over the month after seasonal adjustments, although the improvement in four of them was at a slightly slower pace than August.

“Sales (52.9 points), new orders (51.9) and employment (51.4) growth moderated while stocks (51.8) built up at a slower rate,” the group said.

Supplier deliveries bucked the trend, rising to 52.6 after contracting one month earlier.

Despite the moderation in new orders, they still increased from August, suggesting that activity levels across the sector are likely to remain healthy in the latter parts of the year.

Given services is the largest employer in the country, the moderation in the employment subindex also hints that the strong hiring levels seen in recent months may now be starting to slow.

Source: Ai Group

Like the consistency in the activity subindices, most individual sub-sectors also reported that activity levels improved from August.

“Six of the nine sub-sectors expanded in September in trend terms with results above 50 points,” the Ai Group said.

“Activity accelerated in finance and insurance (63.7 points), personal and recreational services (62.9), communications services (58.6) and health and community services (52.5 points).

“Wholesale trade (56.8 points) grew at about the same rate as in August… while growth in property and business services (52.4) decelerated.”

However, despite those strong performances, concerns surrounding the health of Australia’s household sector remain with activity levels for consumer-related sectors contracting at an alarming rate.

“Reluctant consumer spending saw activity shrink at a faster rate in September in retail trade (43.1 points), while the index for the hospitality sub-sector — measuring accommodation, cafes and restaurants — fell by 3.5 points to a record low of 35.7 points.”

Hardly a ringing endorsement on what is the most crucial cog in the Australian economy, especially following weak retail sales reports in June and July.

Only yesterday, the RBA warned that “slow growth in real wages and high levels of household debt are likely to constrain growth in household spending”. Based on the PSI survey, it suggests that’s now taking place.

“Respondents in retail and hospitality are reporting reduced spending by consumers due to a mix of increased household electricity costs, flat income growth, and relatively poor consumer confidence,” the Ai Group said.

In contrast, the group those sectors tied to the performance of the business sector — where strong trading conditions have lead to improved profitability — continue to benefit from strong demand.

“Respondents in the business-oriented sub-sectors noted positive demand coming from the construction and mining sectors, predominantly in the eastern states,” it said.

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