Australia's giant services sector is in good shape and wages are rising, but there are signs job creation is slowing as a result

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  • Activity levels across Australia’s services sector improved again in September, continuing the theme seen in the prior 18 months.
  • Retailers and hospitality firms continue to report stronger demand from consumers, a good sign in regards to household finances.
  • However, margin pressures remain acute for most services firms. Firms also reported a steep lift in worker wages, although they indicated they marginally shed staffing levels during the month.

Activity levels across Australia’s hugely-important services sector continued to improve last month, helped by stronger demand from both businesses and consumers.

However, that was not enough to lift hiring levels which fell marginally, hinting that employment growth may slow further in the months ahead.

The Australian Industry Group’s (Ai Group) Performance of Services Indicator (PSI) rose to 52.5 last month in seasonally adjusted terms, up 0.3 points on the level reported in August.

The PSI measures changes in activity levels across Australia’s services sector from one month to the next. Anything above 50 signals 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.

So at 52.5, activity levels improved at a marginally faster pace in September, continuing the improvement seen in each of the past 19 months.

However, as seen in the chart below, momentum across the sector has slowed sharply in recent months, sitting well below the series high of 63.0 struck in June this year.

Despite slower improvement in recent months, the Ai Group said demand was steady from both businesses and consumers last month, reversing the trend seen throughout much of last year and in early 2018 when it was business demand that drove activity across the sector.

“Business-oriented sub-sectors such as property and finance reported steady demand from construction projects, although transport and storage businesses noted a continued contraction in business activity,” it said.

“Health, retail trade, wholesale trade and hospitality also reported positive results in September.”

Of note, activity across the retail sector improved at the fastest pace since June 2016, a result that bodes well for retail sales and household consumption in the latter parts of the September quarter. The hospitality industry also fared well, recording the fastest improvement in well over a year.

Helping to offset those positive results, activity levels for transport and storage services slumped, deteriorating partially on the back of “strong price competition”.

Over the month, the group said activity improved in seven of the nine sub-sectors monitored in trend terms.

Mirroring the broad-based improvement in most sub-sectors, four of the survey’s five activity subindexes also improved from August in trend terms, including new orders, a lead indicator on likely activity level in the months ahead.

Ai Group

However, despite the lift in new orders and firm levels of demand, that didn’t translate through to faster hiring with the employment subindex slipping to 49.8, indicating that staffing levels were reduced marginally.

As the largest employing sector in Australia, this reading will be watched closely in the months ahead, especially should it weaken further.

Perhaps contributing the slowdown in hiring, firms indicated that wage growth for workers increased rapidly, lifting to 63.3 points, up 4.3 points from a month earlier.

“This recent elevation may reflect wage increases linked to this year’s minimum wage increase of 3.5% making their way through businesses payroll systems,” the Ai Group said.

Increased margin pressures may also explain the slowdown with firms unable, or unwilling, to pass on higher input costs to their customer.

The subindex measuring input costs stood at 61.9 points while that for selling prices slumped to 46.4. Put another way, input costs rose sharply while selling prices actually fell.

“Respondents reported that increasing input costs, particularly electricity and gas costs, are exerting increased pressure on margins,” the Ai Group said.

It said that most firms face “ongoing difficulties” in implementing price rises.

That suggests that while demand may be improving, it may only be doing so due to lower end costs for customer. It also points to a continuation of low inflationary pressures for consumers in the period ahead.

Net-net, the September report was OK without being spectacular. There are undoubtedly pleasing signs for wage growth but not so for employment. In order for wage and inflationary pressures to be sustained, employment will need to remain firm to help reduce unemployment and underemployment within the labour market .

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