Australia just received another unsettling reading on the health of household finances

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Activity levels across Australia’s services sector improved for a fourth consecutive month in August, adding to evidence that Australia’s non-mining sectors are continuing to strengthen.

However, there’s still plenty of concern about the health of household finances.

The Ai Group’s latest Performance of Services Index (PSI) fell by 3.4 points to 53.0 in August in seasonally adjusted terms, pulling back from the multi-month struck in July.

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 53.0, activity levels still improved last month, albeit at a slower pace than July.

Using a three-month moving average — a better guide as to the overall trend in activity levels — the index rose to 53.6, leaving it at the highest level since September 2015.

Like the headline PSI, most of the survey’s activity subindices grew at a slower pace than July.

Source: Ai Group

After seasonal adjustments, the Ai Group said that growth in sales, employment and new orders all decelerated while supplier deliveries were largely unchanged.

Inventory levels were the only activity subindex to register an increase, rising 4.1 points to 54.9. The Ai Group said this may reflect slower growth in new orders and sales during the month.

While not as strong as the levels reported in July, the sales and employment measures all held above 50, pointing to continued growth. At 54.2, the new orders subindex also points to the likelihood of strong activity levels in the remainder of the year.

Perhaps of more importance than any of the fluctuations in the activity subindices, the Ai Group said that capacity utilisation across the sector jumped by 3.2 percentage points to 81.4%, leaving it at the highest level on record.

This reveals that improved activity levels are reducing spare capacity across the sector, a good sign for inflation and business investment in the period ahead.

It also fits with recent data released by the ABS which revealed a steep jump in expected business investment by services firms in the current financial year.

Adding to the reasonable August report card, the Ai Group said that activity levels strengthened in seven of the nine industries monitored, pointing to a broadening recovery across the sector.

However, the measure for retailers slumped 1.1 points to 42.1, a concerning outcome given its the second-largest employer in Australia.

Activity levels for firms operating in the hospitality sector — accommodation, cafes and restaurants — also weakened sharply with its subindex sliding 4.5 points to 38.5 points.

“Respondents in retail and hospitality are reporting reluctant spending due to flat income growth, adverse winter weather and relatively poor consumer confidence,” the Ai Group said.

Both results offer a concerning view on the current strength of Australia’s household sector, and will need to be closely monitored in the months ahead. Putting it bluntly, there’s unlikely to be a self-sustaining economic recovery in Australia if the household sector doesn’t join in. If it doesn’t improve, neither will the economy, at least in the longer-term.

Offering a hint as to why activity levels are holding up across the broader services sector, the Ai Group said that respondents tied to the business sector noted continued demand from the construction and mining sectors, particularly in the eastern states.

That outcome also mirrors the recent divergence between measures on Australian business and consumer confidence. The former is benefiting from the strongest operating conditions since before the global financial crisis while the latter is subdued thanks to persistent low income growth.

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