Services in recession, again

If you’ve been running a services sector business and wondering why your turnover is down despite all the talk of a boom, then today’s Services PMI might help clear things up for you. The Australian services sector has been dipping in and out of recession all year, including in October:

In case you’re wondering whether there is something wrong with the picture and that can’t possibly be true, here’s a longer term view of the index:

As you can see, the recent year is far from typical for the index. It’s part of the economic adjustment that the RBA has sought to manage that is now looking as if it’s been overdone.

Looking at segments for October, most deteriorated:

Good expansion for finance and a touch for property and that”s about it. Full report below.

Psi Oct11 Report (1)

Comments

  1. It’s NOT part of the economic adjustment to Quarry Australia. Surely it is quite the opposite. The current Quarry Australia has two parts
    1. Sell the mine to some foreign interest so we can continue to over-consume
    2. Get the foreign interest to mine the deposit as quickly as possible so we can continue to over-consume.

    Both parts encourage an over-bloated service/govt sector.

    The current downturn in the service sector is despite these two influences from Quarry Australia and is due solely to our over-indebtedness.

  2. Yes interesting Jason and this is 4 or 5 months ago now but I had occasion to visit my orthopaedic specialist. He reckoned then, although doctoring was the best place to be, some patients were cancelling operations because of money issues.
    (This has no particular point just reporting what he said)

    • ..seems it can get pretty hard to draw value to one’s health,once the overall funding frame-work starts to wobble,in little relief,but particular points..Thanks,flawse Stay-well and steadfast my friend…JR

  3. “It’s part of the economic adjustment to Quarry Australia”

    HnH, that is a disingenuous summation, one that ignores the very content of the report.

    From the report:

    “…conditions in sub-sectors directly exposed to household spending (such as the retail trade and hospitality sub-sectors) remain subdued.”

    Household spending – the end of the debt-finance boom clearly more disruptive than any other boom.

    “…slowing commercial construction activity and property sales in recent months has contributed to weaker levels of activity.”

    Lack of business confidence and end of the property boom clearly more disruptive than any other boom.

    “On the other hand, a number of members cited the benefits of the mining sector activity on their business.”

    BENEFITS. Benefits of the resources boom. Benefits flowing through to business activity.

    Constant references to Quarry Australia being the problem accompanied by the regular ‘demonising’ of the resources sector here at MB present a very real danger to impartial and, at times, factual analysis.

    This report has nothing to do with ‘Quarry Australia’ and you know it.

    • That’s a bit rich from you, “Fanboy”.

      Nonetheless, I think you’re right, though it was clumsiness not bias. Really meant that the RBA has overdone its “adjustment” which involves “making room” for Quarry Australia. I have always acknowledged that that adjustment would have been FAR worse without mining. Have changed accordingly.

  4. Sorry H&H. You do suffer bias…which does result occasionally in a ‘clumsy’ response. Your bias (passion?) has caused you to call this one incorrectly. Just the same we are free to give reasoned comment on what you write so that’s fine. That’s where you are coming from.

    What is VERY objectionable around here is the sort of rubbish exemplified by the Lorax comment above. It’s become far too common of late.
    Also reasonably objectionable is the attempt to reduce the worth of 3d1k’s comments by resorting to the term ‘Fanboy’ as some sort of perjorative term.

    • If it comforts you to see it as bias then so be it. I have argued better and in more detail than anyone in the Australian media why the mining boom has saved us(delayed or softened) from a dreadful fate.

      Rather, what you mining boys can’t seem to fathom is that there are genuine national interest downsides to the mining boom as well. They include:

      – the loss of diversified exports, especially manufacturing
      – a debauching of the political economy such that mining and its interests are overly influential in Canberra

      These have often been a part of mining booms in other countries and you would expect them to transpire. Hence such phrases as “resources curse”. I aim to combat them.

      You talk about freeing Australia from a terrible sense of entitlement – and I agree – but you fail to acknowledge that the above downsides of the boom are making that entitlement FAR worse.

      The bias is yours my man.

      • Really?

        – the loss of diversified exports, especially manufacturing: there has not been a substantial loss of export manufacturing to date, the high AUD has been the prime cause and as we operate a floating exchange rate in global markets those concerned should lobby their local parliamentarians if they seek change to the non-intervention policy. Still way too early to call on this one in any case.

        – a debauching of the political economy such that mining and its interests are overly influential in Canberra: Hyperbowl! The resources sector – ‘overly’ influential as compared to the banking and finance sector, the property sector, all the sectors that received billions in subsidies etc, the Greens and a couple of Independents…I don’t think so. The resources sector is well down the list when it comes to influence in Canberra.

          • Not pointless at all. Although frustrating yes, for us both.

            Every time ‘blanket’ statements (like the ones above) are made, particularly when devoid of supporting argument or data scrutiny is required. Without a modicum of analysis ‘blanket’ statements are little more than personal opinion or perhaps a reflection of subconscious biases.

            I am always open to factually based argument which is often done very well here at MB, but mere opinion I may challenge…which should be welcomed as it provides opportunity to persuade via evidential support not only the challenger but also the wider readership.

        • 3d1k Mining is part of the reason the AUD is so high. Mining goes down the toilet lets see what happens to the AUD then. HnH is right Australia has the mining curse now and it is going to come back and bit the whole country.

        • Manufacturing was dying well before mining; a much greater cause for the reduction in industry/manufacturing is the housing credit bubble/rise of financial services in economic important, as well as “free trade” with interventionist countries such as China, and in ability to recognise the destruction caused by the carry trade.

          Mining is a relatively recent addition in the list of things killing manufacturing.

  5. – Services PMI is negative
    – Retail is flat-to-negative
    – Manufacturing PMI is negative
    – Tourism is negative
    – Education is…?
    – Mining is rapidly turning.

    Hmmmmmmmmm. nice picture there.

  6. Not to sure if I was included in the ‘you mining boys’ since the first part of your sentence referenced my remark re bias! I presume so and you KNOW that is not the fact.

  7. Stsn yep! If TV advertising any guide. Half of it must be insurance one form and another. ‘Funeral Insurance’ is Australia’s new big growth industry.

  8. I think the data on Australian manufacturing is interesting, and does not, by itself, support the proposition that mining and the high currency has caused caused the evident decline in manufacturing.

    Consider trade in high-value-added manufactures. Through the Mining Boom Act 1 (from 2001-2008), even though the AUD appreciated very noticeably, both imports and exports of elaborately transformed manufactures (and other manufactures) increased steadily. The decline in production and exports was precipitated by the 2008/9 global trade shock, also associated with a deep but short-lived AUD depreciation. The decline in imports at this time was of an even greater magnitude than the decline in exports. When expressed in AUD terms, exports have not recovered. But neither have imports.

    This suggests to me that the stress experienced in export manufacturing cannot be explained by the strength of the resources sector or exchange rate and terms-of-trade effects alone.

    We have to consider Australian manufacturing in the context of the global industrial goods sector, which has been characterized by over-investment, excess capacity and, from late 2010, obvious progressive deceleration. We are experiencing the same demand fatigue as other economies – the same fatigue that has dragged down global PMI’s over 2011 and which point to recession in industrial economies in 2012.

    The weakness in domestically oriented manufacturing has to be seen against the general remission of consumer demand in the post-GFC economy, also expressed in declining housing-related construction and prolonged lethargy in the services sector. Not for the first time in its history, the RBA has underestimated the effect of higher interest rates on household behaviour. But this is hardly in itself evidence of Dutch Disease. It just says Australians have realised they have too much debt and are adjusting to suit.

      • Don’t give up…..have a look at the stats….they are not as dire as you seem to think…..exports of ETM’s have flat-lined since the GFC.

        Consider, incomes have been rising, consumption has not been rising so quickly, which means consumption of goods (imported as well as domestically-produced) and services has not risen as quickly as in the high-deficit 1990-2000’s. What has risen instead? Savings.

        In the domestic economy, we are seeing households adjust to their excess gearing.

        In the export sector, we are seeing the same tendencies in our exports as other economies see in theirs….generally difficult conditions for manufacturing, ameliorated by good prices for some supply-constrained bulk commodities.

        • Sigh…I know the data inside out. Do you think I argue for an SWF, for shifting macroeconomic settings towards greater saving and investment, higher R&D and increased export diversity for today?

        • Briefly…I think your time frame is errrr ‘too brief’

          I differ with H&H in that this is NOT a new phenomenon. I’m sure you are right re world manufacturing etc but the effect has been aexacerbated by an A$ that has been overvalued for 50 odd years.

          I guess I argue in terms of ‘good sense’ rthter than stats. My criticism always is you young blokes can’t see back far enough and perhaps good stats don’t go back far enough either.

      • I agree with Briefly – don’t give up. FWIW it is not whether I support manufacturing or not (I do), but rather accurately identifying the diverse factors that have led to manufacturing’s current predicament and ideally recognize factors that ensure to its continued survival. As you have long argued, a diversified economic basic promotes a more robust economy. We may be looking at the same issue via different prisms, however I suspect desirous of similar outcomes

        PS – I’m sane too!!

  9. HnH, I’m not agin manufacturing. Not at all. But trade in ETM’s took its big slap in 2008/9. It has not recovered, and I think this would probably have occurred with or without the Boom Mark II.

    Global markets in general are saturated and cracking because of structural imbalances. This is the problem….exhausted demand, excess debts, the imposition of austerity, consumers rationing their spending more aggressively….

    Even in WA, where we have almost no manufacturing (so Dutch Disease is not a possible phenomenon) and resource-related incomes are high, you can see the changes in household behaviour. They are very obvious. I think this is the main driver of changes in demand and output.

    • My position seems to have been badly confused. I believe the following:

      – Australia has a credit bubble
      – the RBA and households know it
      – both are trying to adjust away from it
      – we have a mining boom that is helping support incomes during that transition
      – the mining boom is being poorly managed and we are making the same pro-cyclical mistake with mining that we made with credit
      – Dutch disease is hurting manufacturing and services exports. The Oz PMI has been roughly the equivalent of Greece for the past year – that is much worse than elsewhere and exports have fallen for two years and no doubt this year as well
      – Thus I’m most concerned about the future, when our export dependence gets even more narrow and we find ourselves at the end of the boom with nothing to show for it but a few holes, rapidly deflating houses and nationalised banks
      – The AIG is doing a dreadful job of representing it’s members.

      Clear now?

      • Got it. The PMI’s have been poor, though not Hellenic. Meanwhile, looking at trade as such….

        Exports of Total Manufactures (A$)

        2006 = 41.974 bill
        2007 = 45.243
        2008 = 47.016
        2009 = 38,653
        2010 = 40,379….long way to go

        Imports of Total Manufactures (A$)

        2006 = 136,063 bill
        2007 = 144,758
        2008 = 164,334
        2009 = 147,053
        2010 = 154.908…not so far to go

        Essentially, manufactured imports have risen significantly faster than manufactured exports, continuing a trend in place since at least 2001, even allowing for the 2008/9 disruptions. Imports that have re-grown quickest following the GFC are machinery and transport equipment. Other classes of imports have failed to re-bound to pre-GFC levels though are still higher than in 2006.

        Australian manufactured exports have only partly regained their 2006 levels. Notably, exports of machinery and transport equipment are still lower than in 2005 though other classes of manufactures are slowly regaining their earlier levels. This must certainly be related to the AUD exchange rate and weakness in the global auto market.

        I reckon we are experiencing a touch of Italian disease – prolonged poor productivity performance, leading to a loss of competitiveness and a deteriorating balance of trade in manufactures, combined with an over-valued currency that we cannot do much about. Luckily, public debt is not of Roman proportions, but private debt certainly is.

        (See Composition of Trade, Dept FA&T, 2010, tables 8 and 11)

      • Unfortunately I agree apart from not knowing what the last one is about. Pardon my ignorance.
        I would add that IMO the timing of announcing the mining tax when the problems in Greece surfaced last year was awful. Even if the idea is on the right track the implementation is very late in the cycle. Diversification away from the “houses and holes model” described here so well the other day would have been important all along. How? I don’t know. I’m sure there are promising R&D teams worth investing in. R&D of private companies could also co-work with Universities.
        Personally I fear that every man and his dog will be trying to crank up manufacturing to create jobs from now on, so I wonder what each country will end up exporting and where.

  10. Cheer up HnH…I’m with you really!!

    I think our economy is being managed with a view to the numbers in the House of Representatives rather than the numbers in the National Accounts. This is a pity. As you suggest, we really need to improve national savings and investment, find ways to improve the dynamism of business and expand the “innovation-quotient” in our economy. Science- and engineering-based businesses need to be favoured precisely because they are less susceptible to currency fluctuations.

    Still, we have a long way to go when political debate is focused instead on wooden boats and gaming revenues.

    • Say it with me – Research Bonds!!!

      Yes, need to get cash out of bank deposits (so they can’t support credit growth into unproductive investment in houses) and into corporate and government debt for investment in productive capacity (infrastructure e.g) and research….

      Not sure why pollies and their economist crones can’t get this through their respective heads, but I think you nailed it in your last sentence.

      • OK now if the decline in the service sector is in declines in services to primary and secondary industry – that’s a problem.

        If your decline in service industry is in retail, recreation, restaurants, Govt, Law and accountancy etc then it does not hurt manufacturing. In fact it is a necessary part of the adjustment to a better balanced economy and allows ‘room’ for manufacturing.

        Manufacturing, mines, and primary industries should drive services. Services should not be the measure of growth as service growth not backed by growth in other industries is just financed by debt and not REAL growth.

          • Hi Prince,

            I have read through the bond posting. It is an interesting idea. I need to think about it some more.

            One question arises on an initial reading…what happens if the money subscribed for a particular bond is lost (wholly or in part)? How does the subscriber get their capital back? From the Government? Or do they just accept the loss?

            If it is the former, then the Government will want to have an input into the projects that are proposed. This raises the possibility that some projects might have an implied guarantee attached to them, which is problematic. If it is the latter, then I would be concerned that investors would not be in a position to make informed choices.

            Do you contemplate a large “pooling” of funds and a blending of returns…some interest income, some dividends, some vendor equity in new companies…? Is it possible to run pooled funds without taxpayer liability for income payments, but with concessions on the ingoing (capital input) side?

            Lemme think on it. (I’m very glad someone has been thinking about this subject….we need a better model than enterprise-based R&D)

  11. Ah also agree a decline in exported services is a problem! However as we know, particularly under Howard, some of that was driven not by our skill but because it was providing a gateway.