Australia's enormous services sector continues to splutter

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Activity levels across Australia’s services sector continued to weaken in September, albeit at a slower pace than August.

The Ai Group’s Performance of Services Index (PSI) rose by 3.9 points to 48.9, signalling a mild decline in activity levels across the broader services sector.

Like the better-known PMI reports, the PSI measures changes in activity levels across Australia’s services sector from one month to the next. A reading above 50 suggests that activity levels have improved while a sub-50 figure indicates that they have deteriorated, so the higher the number the better.

Despite the weakness in the headline index, the internals of the report were — on balance — stronger with sales and new orders, a lead indicator on future levels of activity, both expanding during the month.

“The sales sub-index jumped almost 10 points higher to 53.3 in September, marking a solid recovery from the contraction in sales in August,” noted the Ai Group.

“The new orders sub-index lifted by 6.2 points to 53.7 points and returned to expansion in September. New orders have been expanding, on average, over the past 12 months. This suggests further increases in sales and activity are likely over coming months,” it added.

Outside of sales and new orders, gauges on stocks, supplier and inventories and employment continued to contract, the latter a worrying outcome considering the services sector is the largest employer in Australia.

The table below from the Ai Group shows the internal movements in the PSI seen in September. The group uses 3-month moving averages for all of the PSI’s subindices in an attempt to reduce month-to-month volatility in the survey.

By sub-sector, the Ai Group notes that four of the nine industries monitored saw activity levels improve in September.

“Four of the nine services sub-sectors expanded in September,” it said.

“These included personal and recreational services (57.1), health and community services (55.9), communication services (55.8) and wholesale trade (52.5).

There was a mild contraction in finance and insurance (48.1) and property and business services (48.0). Retail trade dropped firmly into contraction (42.1) while accommodation, cafes and restaurants (41.4) continued a sixth month of decline. Transport and storage (33.0) was almost unchanged from August, when it reached a record low for this series.

Like the activity subindices, the Ai Group uses 3-month moving averages to gauge performance across individual subsectors.

The weakness in retail trade and accommodation, cafes and restaurants fits with recent consumption and retail sales data which has also been underwhelming, at least compared to historic norms.

That point was touched upon by Innes Willox, CEO of the Ai Group, following the release of the report.

“The services sector looks to have made a partial recovery from the problems of August, with the decline in activity easing off considerably in September,” he said.

“Cautious and selective consumer spending remains a worry for many retail, hospitality and other businesses, with the usual winter hump in retail sales seeming to last a little longer this year.

“More positively, recent increases in government spending and infrastructure investment are helping to boost demand in the more business-oriented services sectors, particularly in NSW and Victoria. Businesses are becoming more confident about ordering goods and services from each other, but conditions remain fragile and patchy across sectors and geographies.”

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