Australia's giant services sector just suddenly stalled

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After 13 months of constant improvement, activity levels across Australia’s manufacturing sector weakened sharply last month.

The Ai Group’s manufacturing Purchasing Managers’ Index (PMI) plummeted 9.5 points to 46.9, marking the first deterioration in activity levels seen since June 2015.

The initial market reaction was somewhat “ho hum”, with many expressing the view that not only is the survey volatile at the best of times, Australia’s manufacturing sector is now of far less of importance than what it once was.

Australia, as many rightfully pointed out, is now a services economy, accounting for more than 70% of economic growth.

Well, the news on activity levels across the nation’s services sector was equally as ugly for August, suggesting that the weakness seen in manufacturing was likely symptomatic of a broader trend.

The Ai Group’s Performance of Services Index (PSI) plunged by 8.9 points to 45.0 for the month, marking the lowest reading since November 2014.

It was also the largest points decline for the index in the history of the survey, continuing the trend established in the manufacturing PMI report.

Like the PMI, the PSI measures changes in activity levels across Australia’s services sector from one month to the next. A reading above 50 signals is an improvement in activity levels while a sub-50 level indicates that activity levels are contracting.

In a nutshell, the higher the number the better.

According to the Ai Group, all five of the surveys activity subindices saw activity levels contract from the levels seen in July, led by an alarming drop in gauge measuring sales.

It slumped 15.7 points to 43.7, leaving it at the lowest level since December last year. It was also the first time this year that sales levels declined compared to the prior month.

Elsewhere measures on new orders, employment, inventory levels and supplier deliveries fell by 4.7 points, 6.5 points, 8.4 points and 8.4 points respectively, leaving them all below the 50 level that signals a deterioration in activity levels.

Of note, especially given the renewed focus on the health of the Australian labour market, the employment subindex fell to 43.5, the lowest level seen since April 2009.

That suggests that firms shed staff at the fastest pace since the depths of the global financial crisis last month, at least according to this survey.

Not good.

The table below from the Ai Group has all the unnerving details. The Group uses three-month moving averages in the activity and industry subsectors to smooth out month-to-month volatility.

In somewhat better news, the deterioration in the headline index was not driven by broad weakness across the entire sector with five of the nine industry subectors surveyed reporting an improvement in activity levels in August.

The finance and insurance (55.1), retail trade (55.0), personal and recreational services (54.5), communication services (52.4), and wholesale trade (51.9) sectors all saw activity levels improve, helping to offset steep contractions in property and business services (46.1), accommodation, cafes and restaurants (43.2), and transport and storage (32.9) during the month.

Activity levels across the giant health and community services sub-sector (49.9) — the largest component in the survey — remained broadly steady over the month.

Following the weak manufacturing report for Australia released late last week, Innes Willox, CEO of the Ai Group, “sounds a sobering warning of the fragility of the economy”.

“The results demonstrate that business urgently needs confidence-building measures which drive productivity and reduce costs and barriers to growth. Now, more than ever, business needs all sides of politics to act together in the national interest,” Willox said.

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