MEDIA CONTACT Tony Melville Australian Industry Group Tel: 02 6233 0716

SEPTEMBER 2013

Services sector decline eases in September

Australian PSI Sep 2013: 47.1 KEY FINDINGS

USA ISM PSI Aug 2013: 58.6

Eurozone flash PSI Sep 2013: 52.1

UK CIPS PSI Aug 2013: 60.5

Japan Markit PSI Aug 2013: 51.2

China HSBC PSI Aug 2013: 51.8

The latest seasonally adjusted Australian Industry Group Australian Performance of Services Index (Australian PSI ) improved by 8.1 points to 47.1 points in September.
This was the highest level for the
Australian PSI since March 2013 (49.6 points), but it remains below the 50-point mark that separates expansion from contraction in this survey.
The Australian PSI has been below 50 points for 20 months (since January 2012), which is its longest run of continuous contraction since the series commenced in 2003.
All of the activity sub-indexes that make up the Australian PSI improved in September, but remained below 50 points, indicating continuing net contraction.
Only the health and community services sub-sector expanded in September (in three month moving average terms). All other sub-sectors that make up the Australian PSI remained below 50 points, indicating net contraction relative to the previous month.
Businesses noted that confidence and activity had improved in September following the Federal election, but this positive effect was weak at best. Declining investment activity from the mining industry, relatively cautious consumer spending and cheap imports were still acting as brakes on local demand for consumer and business services alike in September.

ACTIVITY SUB-INDEXES

The sales sub-index in the Australian PSI increased by 12.9 points to 48.4 points in September 2013. This was the highest level for sales since March 2013 (50.8 points). The new orders index in the Australian PSI increased by 8.0 points to 47.9 points. This was a welcome improvement for this leading indicator of demand, but was insufficient to push it into expansion. It has been below 50 points in every month since June 2012.
The employment sub-index in the Australian PSI improved marginally, up 1.1 points to 46.6 points in September. This sub-index has been below 50 points since March 2013.
Supplier deliveries improved strongly in September but indicated a mild net contraction in deliveries overall (under 50 points), with the sub-index jumping by 12.2 points to 46.4 points.
Inventories (stocks held by companies) continued to contract in September, albeit at a milder pace. The inventories sub-index improved by 8 points to 44.3 points in September.
Capacity utilisation across the services industries improved by 5 percentage points to 76.2% of current capacity being utilised, the highest such rate since March 2013.

PRICES SUB-INDEXES

Input prices increased more strongly in September, with the input costs sub-index in the Australian PSI rising 1.4 points to 66.3 points, indicating the highest proportion of businesses reporting input price increases since September 2012. Businesses said this was due to the recent fall in the Australian dollar pushing up the prices of imported inputs, as opposed to the carbon tax which was perceived to be the main reason for stronger input price rises last September. Wage pressures moderated further in September, with the average wages sub-index in the Australian PSI falling 2.6 points to 57.0 points in September. This suggests wage inflation is cooling already, following the usual seasonal spike in July as the annual minimum wage rises and other pay rises commence at the start of the new financial year. Selling prices are still contracting on average, albeit at a slower pace. The selling prices sub-index in the Australian PSI improved by 4.3 points to 47.5 points in September. This sub-index has been below 50 points in every month since October 2011, reflecting the fierce price competition that is apparent especially in the retail sales sub-sector.

RETAIL TRADE; WHOLESALE TRADE *

The retail trade sub-sector in the Australian PSI continues to exhibit weak demand and various pricing stresses, with the retail trade index falling 1.9 points to 42.6 points in September (in three-month moving average terms). The retail trade sub-sectors index has been under 50 points (indicating net contraction) in every month since June 2011, reflecting a protracted period of tough trading for this industry due to the high dollar and cautious consumer spending on discretionary (mostly non-food) goods.
The wholesale trade sub-sector in the Australian PSI appears to be improving since its recent low point in May this year. This sub-sectors index improved by 3.2 points to 41.5 points in September (in three-month moving average terms). The wholesale sub-sector remains in net contraction (under 50 points) however, as it has in every month since February 2011 (in three-month moving average terms).

HOSPITALITY; HEALTH SERVICES; RECREATIONAL SERVICES *

The accommodation, cafes and restaurants sub-sector (hospitality) followed a broadly similar track to the retail trade sub-sector in September, falling 0.5 points to 36.3 points (three-month moving average). This sub-sector is being affected by the same consumer caution regarding local discretionary spending as retail trade, plus significant leakage in local holiday spending to increasingly popular overseas holiday destinations (monthly ABS data continues to show record numbers of Australian residents now holidaying overseas).
The personal and recreational services sub-sector was, until recently, doing better than the hospitality or retail trade sub-sectors, but in September it slipped further below 50 points for a second consecutive month. This sub-sector fell another 4.7 points to 43.9 points (three month moving average), breaking a run of expansion that was evident earlier in 2013.
The large health and community services sub-sector was the only sub-sector to show expansion this month in the Australian PSI . It improved by 1.9 points to 55.8 points, in a third consecutive month of expansion (above 50 points, three-month moving average).

PROPERTY AND BUSINESS SERVICES; FINANCE SERVICES *

The property and business services sub-index improved by 1.1 point to 39.2 points in September. Despite the improvement, this sub-sectors index remained below 40 points for a fourth consecutive month, signifying extremely tough trading conditions. Businesses in this sub-sector include real estate, accounting, legal, engineering, recruitment and administrative services. They indicated that although local business-to-business demand has picked up since the Federal election in early September, it remains relatively weak. The finance and insurance sub-sectors index improved by 7.6 points to 38.6 points in September (in three-month moving average terms). This sub-sector appears to be experiencing a lull in demand from business customers, as business transactions, business credit, re-financing and re-insurance slow down. This sub-sector has had index readings under 50 points (indicating net contraction) in each of the past six months, following an extended period of expansion over the previous two years (from April 2011 to April 2013).

COMMUNICATION SERVICES; TRANSPORT SERVICES *

The communications sub-sectors index indicates demand for new products and services remains weak, with the index falling by 0.7 points to 39.2 points in September. The index for this sub-sector has remained below 50 points since November 2011 (three-month moving average), including an extended period below 40 points throughout 2012 and early 2013. The transport and storage services sub-sectors index improved by 3.6 points to 37.4 points in September, but it has languished below 40 points in every month since January 2013 and recorded readings below 50 points since July 2012 (three-month moving averages). Businesses say this transport downturn is due to the flow-on effects of weak consumer demand in the retail sector as well as low residential and commercial building activity, requiring less goods and materials to be transported. The expanding transport needs of the mining sector (which is in the process of growing its output volumes considerably) are mainly benefiting freight transport providers in Queensland and Western Australia (e.g. bulk freight services by rail and long-distance road carriers). Index this month 47.1 48.4 47.9 46.6 44.3

Seasonally adjusted index Australian PSI Sales New Orders Employment Stocks

Change from last month +8.1 +12.9 +8.0 +1.1 +8.0

12 month average 44.0

Seasonally adjusted index Supplier Deliveries Input Prices Selling Prices ** Average Wages ** Capacity utilisation **

Index this month 46.4 66.3 47.5 57.0 76.2%

Change from last month +12.2 +1.4 +4.3 -2.6 +5.0

12 month average 44.0 61.8 44.8 56.9 75.0%






* All sub-sector indexes in the Australian PSI are reported as three-month moving averages (3mma), so as to better identify the trends in these volatile monthly data. ** Unadjusted.
What is the Australian PSI ? The Australian Industry Group Australian Performance of Services Index (Australian PSI ) is a seasonally adjusted national composite index based on the diffusion indexes for sales, orders/new business, deliveries, inventories and employment with varying weights. An Australian PSI reading above 50 points indicates 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. For further economic analysis and information from the Australian Industry Group, visit http://www.aigroup.com.au/economics. *For further information on international PMI data, visit http://www.markiteconomics.com or http://www.cipsa.com.au. The Australian Industry Group, 2013. This publication is copyright. Apart from any fair dealing for the purposes of private study or research permitted under applicable copyright legislation, no part may be reproduced by any process or means without the prior written permission of The Australian Industry Group. Disclaimer: The Australian Industry Group provides information services to its members and others, which include economic, and industry policy and forecasting services. None of the information provided here is represented or implied to be legal, accounting, financial or investment advice and does not constitute financial product advice. The Australian Industry Group does not invite and does not expect any person to act or rely on any statement, opinion, representation or interference expressed or implied in this publication. All readers must make their own enquiries and obtain their own professional advice in relation to any issue or matter referred to herein before making any financial or other decision. The Australian Industry Group accepts no responsibility for any act or omission by any person relying in whole or in part upon the contents of this publication.