Services Sector Contracts In February

The Australian Industry Group Australian Performance of Services Index (Australian PSI) rose slightly by 0.2 points to 44.5 in February – a second month of contractionary conditions for the services sector in the wake of its 22-month positive run stretching back to early 2017 (results below 50 points indicate contraction, with the distance from 50 points indicating the strength of the decrease).

Ai Group Chief Executive, Innes Willox, said: "The contraction in the services sector continued in February following a period of slowing activity over the second half of last year. New orders dropped considerably and sales softened again which was reflected in businesses holding increased inventories. The consumer-focused segments were largely contractionary with weakness in consumer spending across the majority of these sectors with retail and hospitality faring the worst. However, business-orientated sub-sectors showed more stability to be mostly flat over the month – with the exception of shrinking wholesale trade. Consumer sentiment has fallen faster and more intensely than the business-oriented sectors as concerns around house prices, residential construction activity and the all-pervasive talk of slowing economic conditions take hold on consumer sentiment," Mr Willox said.

Australian PSI – Key Findings for February:

• The Australian PSI was relatively unchanged in February (up 0.2 points to 44.5), remaining in negative territory after January's sharp contraction.
• Two of the five activity indexes in the Australian PSI indicated contraction in February, while two were stable and one expanded (see table below): sales (down 1.5 points to 37.8) and new orders (down 6.9 points to 38.5) both shrank for a second month; in line with this, inventories increased steadily across the month (up 3.3 points to 55.0). Employment improved slightly to be stable (up 1.8 points to 49.3), while deliveries bounced back from a single month of contraction in January to also be stable in February (up 10.6 points to 50.9).
• In trend terms (see table below), the Australian PSI indicated expansion in one sector, was stable in three sectors and contracted in five in February. The consumer-oriented sectors were mainly contractionary; the business-oriented sectors were mostly stable.
• The input prices index moderated by 3.0 points to 60.2 in February, with some respondents reporting increases most notably from imported goods as the Australian dollar traded at low levels similar to late 2015/early 2016. Meanwhile, the selling prices index contracted a further 3.6 points to 43.4 – its lowest result since August 2016.
• The average wages index fell by 2.2 points to 53.0 in February, indicating decelerating wage pressures across the services sectors. The average wages sub-index has been trending down on average since a recent peak of 65.0 points in June 2018.

Results above 50 points indicate expansion. All indexes for sub-sectors in the Australian PSI are reported in trend terms (Henderson 13-month filter).

Background: The Ai Group Australian PSI is a leading indicator of services activity in the Australian economy. It is a seasonally adjusted national composite index based on the diffusion indices for sales, orders/new business, deliveries, inventories and employment with varying weights. An Australian PSI reading above 50 points indicates that services activity is generally expanding; below 50, that it is declining. The distance from 50 is indicative of the strength of the expansion or decline. Results are based on a sample of around 200 companies each month.