Business-oriented services sectors: The Australian PSI® indicated expansion in two of the five business-oriented sectors in October (trend).
Business & property services reported good demand from infrastructure construction projects and communications services also reported positive conditions. Less positively, businesses in the finance & insurance and transport & storage sectors reported contractions in business activity in October, and at a faster rate than in September. The wholesale trade sector was stable in October.
Consumer-oriented services sectors: Businesses in hospitality (cafes, restaurants and accommodation services) and in health, education & community services reported robust expansion in October. Businesses in retail trade also reported positive conditions over the month, with some respondents experiencing solid demand that they linked to recent construction activity. Personal, recreational and other services was the only consumer-oriented services sector to contract in October.
Services wages and prices: The input price index rose slightly in October, indicating a faster pace of inflation for input prices for services businesses. This probably reflected a combination of higher oil and other commodity prices, plus a lower Australian dollar (which makes imported input goods more expensive for local businesses). Average wages continued to rise, but at a more moderate pace than in recent months, returning to levels of growth last seen in February 2018. Despite these ongoing increases in input costs and wage costs, average selling prices fell for services businesses in October. This reflects very strong competitive pressures within services sectors and suggests further compression of profit margins.
Services activity: Three of the activity indexes in the Australian PSI® expanded and two contracted in October. Employment, deliveries and stocks expanded over the month, with the employment index showing its strongest result since June 2018. Sales and new orders both contracted in October, after a relatively solid run of growth earlier in 2018. The sales index fell to its lowest result since August 2016 and new orders index fell to its lowest result since January 2016. This might indicate a temporary slowing in demand after a busy few months, since all of the input indicators – employment, supplier deliveries and inventories – continued to indicate expanding levels of business activity.
Services highlights: The Australian PSI® has been broadly stable or expanding for twenty-five months. It has indicated positive conditions (results above 50 points) for the past twenty months although the rate of expansion has eased since the recent peak in June 2018. Capacity utilisation in the Australian PSI® rose by 4.5 percentage points to 81.9% of available capacity in October. It remains well above its long-run average of 75.9%, which suggests that further employment and investment will probably be needed in order to meet future growth in demand and activity.
Services concerns: Input costs remain elevated for services businesses. Tightening access to finance was mentioned by some respondents as inhibiting their activity in October. Local skills shortages remain a top concern for some businesses, while international trade policy changes are affecting others, particularly in those in the wholesale trade sector.
Finance is your leading indicator with personal spending trailing house prices down. Employment is still strong but for how long…
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
