Australia's services sector is strengthening and that bodes well for the broader economy

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Australia’s services sector, the largest employer and therefore arguably the most important part of the economy, is humming right now.

The latest Performance of Services Index (PSI) released by the Ai Group rose by 3.3 points to 54.8 in June, leaving the index sitting at the highest level since December last year.

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 54.8, activity levels not only improved last month, they did so at a faster pace than May, continuing the trend seen in three of the past four months.

At 53.1, the series three-month moving average — a better guide on the overall trend — has now come in above 50 in each of the past eight months.

Activity levels are steadily improving, a good sign for the broader Australian economy given recent strength in other economic data.

“Respondents noted positive demand for business-to-business services from the construction and infrastructure investment sectors,” the Ai Group said.

Adding to the positive report card, the Ai Group said that all of the surveys five activity subindices also improved from a month earlier in seasonally adjusted terms.

Sales rose 2.2 points to 54.7 points while supplier deliveries and employment, after declining in May, also returned to growth. Stock levels grew at a slightly slower pace, but they still grew nonetheless.

Sales have now increased in each of the past four months.

Perhaps of more importance, particularly when trying to determine activity levels in the months ahead, the new orders subindex surged 6.1 points to 58.9 points, leaving it sitting at the highest level since December last year.

As a lead indicator, this only adds to the strength of the June report, boding well for activity levels in the second half of the year.

This table shows how each individual activity subindex fared in June. The Ai Group used trend data to smooth out month-to-month volatility in each component.

Source: Ai Group

However, while a solid result with all activity indices growing during the month, the improvement was not uniform in nature.

Some sub-sectors performed strongly while others saw activity levels deteriorate.

“Property and business services (57.6 points), finance and insurance (54.7 points), wholesale trade (52.7 points), personal and recreational services (52.3 points) and hospitality (accommodation, cafes and restaurants, 51.2 points) all maintained or improved their growth rates in June,” the Ai Group said.

Activity levels across transport and storage and health and community services were broadly unchanged while communication services and retail trade both reported a deterioration in activity levels.

The weakness in the latter — retail — remains a concern given it is the second-largest employer in Australia behind healthcare. It also casts some doubt as to whether the recent strength in retail sales can last.

The official figures from the ABS say that sales turnover is booming while this survey suggests conditions are anything but healthy.

Activity levels in the sector have now contracted for three consecutive months.

“Retail businesses said lack of customer demand and increased competition from online and offshore sellers detracted from their activity and sales in June,” the Ai Group said.

“Some businesses noted better consumer confidence, but this does not seem to be translating into better conditions or sales in retail.”

In an otherwise strong report card, this was the one fly in the ointment, and should be watched closely given its influence on the broader Australian economy.

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