The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI) rose in October by 5.1 points to a reading of 50.7. This marks only the second monthly expansion in activity for the Australian services sector so far this year.
A reading above 50 indicates an expansion in activity levels, the index last breaching this level back in April. Driving the rise in the index in October were increases in sales and new orders, which reflects improving activity levels in both the retail and wholesale sub-sectors in recent months.
Australian Industry Group chief executive Heather Ridout notes the sales component of the Australian PSI increased by 9.0 points in October to a reading of 55.3. Ridout suggests the improvement in activity levels in the retail and wholesale sub-sectors is a positive sign for consumer spending leading into the December quarter.
The Commonwealth Bank notes most sub-sectors improved in October, the strongest being health and community services, accommodation, cafes and restaurants. Three sub-sectors delivered patchy results, these being the communication, finance and insurance and property and business sub-sectors. The transport and storage sector was the only sub-sector to record weaker conditions in October.
New orders have also returned to a reading above 50, rising 4.6 points in October to a reading of 52.1. Employment continues to contract as evidenced by a reading of 49.4, though Ridout notes the pace of contraction slowed significantly in the month.
Firms in the services sector continue to run down inventories, as the stocks component of the Australian PSI registered a reading of 46.9 in October. This is the fifth successive month of a below 50 reading for this measure.
Supplier deliveries also continue to contract and the below 50 reading in October was the ninth such reading in the past 10 months. Input price growth remains modest when compared to levels prior to the Global Financial Crisis, this measure falling 4.8 points for the month to a 60.1 reading.
On the plus side average selling prices are picking up, Ridout noting this measure registered a reading of 50.6 for October. This compares to a reading of 47.5 in September. Capacity utilisation also improved and came in at 76.1% for October, up from 74.1% in the previous month.
According to Commonwealth Bank the lift in the Australian PSI is encouraging as it implies Australian consumers may be starting to turn more positive. This should see less emphasis on household balance sheet repair going forward.
The bank also suggests the strong Australian jobs market, solid wages and salaries growth and general improvement in household wealth levels from rising share and housing prices are likely to contribute to an improvement in Australian consumer spending in the months ahead.
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