Service Sector Remains Solid

The Australian Industry Group – Commonwealth Bank Performance of Services Index (PSI™) remained steady at 54.6 in August on a seasonally-adjusted basis.

The solid PSI™ result was underpinned by sales and new orders increasing to the highest levels since January and employment at its strongest point since May.

By contrast, the inventory, supplier delivery and input price indexes all eased slightly in August (the slippage in input prices follows five consecutive monthly increases).

In unadjusted terms, activity expanded in six out of nine sectors (down from seven in July). Growth was strongest in accommodation, cafes & restaurants, picking up further from the healthy levels also recorded in July.

Another four sectors - wholesale trade; finance & insurance; property & business services; and personal & recreational services – reported both positive growth and higher readings than the previous month.

Commonwealth Bank Chief Economist, Michael Blythe, said that the latest PSI readings showed that the Australian economy had got off to a good start in the second half of 2004.

"The services sector, the dominant part of the Australian economy, is expanding at a comfortable pace.

"The correlations between the PSI™ and the broader economy suggest that the benefits of a robust services sector are being transmitted through to the labour market, to business capital spending, and to business profits. These trends will help prolong the current expansion," Mr Blythe said.

Australian Industry Group Chief Executive, Heather Ridout, said the August PSI™ reflected continuing confidence across a wide range of service industries.

"If anything, after slowing earlier in the year, service activity appears to have strengthened in the past quarter, reflected in the fact that the PSI™ has averaged higher in the three months to August, compared with the three months to May.

"Despite higher energy costs and cooling house prices, the combined impact of tax cuts, buoyant construction spending, and solid growth in household and business incomes is feeding in to confidence across most sectors. The continuing strength in new orders also augurs well for overall activity in the months ahead," Mrs Ridout said.

The key indicators:

Sectors

• In unadjusted terms, activity expanded in six out of nine sectors (down from seven in July). Growth was strongest in accommodation, cafes & restaurants, picking up further from the healthy levels also recorded in July.

Sales

• The seasonally-adjusted sales index rose 3.6 points to 56.9, the second consecutive increase and the highest reading since January 2004. Seasonal influences (and energy costs) appear to account for much of the easing in retail trade; transport & storage; and communications services.

Orders

• Seasonally adjusted, new orders edged up 0.2 of a percentage point to 58.2. Similar to sales, the new orders index is at the highest level since January 2004, although well down on the corresponding month of 2003.

Jobs

• After seasonal adjustment, the employment index also rose for the second consecutive month, adding 0.9 of a percentage point to 52.2. The index was at the highest level since May and is also higher than in August 2003.

Stocks

• Unadjusted service sector inventories trended 3.8 points lower in August to 51.7, suggesting a moderation in the pace of stock building.

Supplier deliveries and input prices

• Seasonally adjusted, supplier deliveries fell 5.6 points to 51.2. However, the easing follows a sharp rise in July and is consistent with the renewed need to replenish inventories. Prices increased in all sectors in August including the first rise in communications services since December 2003.