november 2012

Weakness in services sector continues

key finDings
The latest seasonally adjusted Australian Industry Group/ Commonwealth Bank Australian Performance of Services Index (Australian PSI) rose 4.3 points in November to 47.1 (readings below 50 represent a contraction in activity with the distance from 50 indicative of the strength of the decrease). This marks the 10th consecutive month that the index has indicated a contraction in services sector activity. The lift in the level of the Australian PSI was supported by growth in health & community services, finance & insurance, and the retail trade sub-sector, which expanded for the first time in close to 12 months. This is an encouraging though tentative sign ahead of retailers peak Christmas trading period. While the Australian PSI remains below the critical 50-point level separating expansion from contraction, the two consecutive monthly increases in the index point to an easing of adverse conditions in the services sector in the December quarter. This should help to support growth in GDP and employment.

NOV

65 60

australian Psi

55

60 55 50
Diffusion Index
Increasing

47.1

50 45 40 35

AUST

45
Decreasing

40 35 30 25

OCT

30

euroZone services inDeX

OCT

65 60 55

Feb 10 Mar 10 Apr 10 May 10 June 10 July 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan11 Feb 11 Mar 11 Apr 11 May 11 June 11 July 11 Aug 11 Sept 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 June 12 July 12 Aug 12 Sept 12 Oct 12 Nov 12

Australian PSI

3 month moving average

EURO

46.0

50 45 40 35

sectors
On a seasonally adjusted basis, three sub-sectors expanded in November, up from only one in October (i.e. the activity index of the industry was above 50 points). Health & community services, finance & insurance and retail trade all expanded in the month. This augurs well for national employment levels, since health and community services and retailing are the nations two largest employing industries. Sub-sectors directly exposed to household spending reported mixed conditions during the month. On the one hand, activity in the retail trade sub-sector was reported to have picked up strongly in November while activity in the accommodation, cafes & restaurants and personal & recreational services sub-sectors declined, after tracking more strongly in early 2012. The business-related sub-sectors were also quite mixed. In these sectors, low levels of consumer confidence, economic uncertainty, weak activity in manufacturing and construction, and the high dollar were again noted as factors contributing to soft business conditions.
Decreasing Increasing

Wholesale trade Retail trade Accommodation, cafes & restaurants Transport & storage Communication services Finance & insurance Property & business services Health & community services

NOV

30

OCT

65 60

uk services inDeX

Personal & recreational services PSI

55 50

10

20

30

40

50

60

70

80

90 100

UK

Diffusion Index

Oct 12

Nov 12

50.6
NOV

45 40 35 30

sales anD caPacity

On a seasonally adjusted basis, sales levels contracted further in November, albeit at a more modest pace. The sales component of the Australian PSI improved by 8.1 points in November, though at 45.7, it remains well below the critical 50-point level separating expansion from contraction. The rise in the sales sub-index was driven by solid growth in sales in the health & community services, retail trade, finance & insurance and transport & storage services sub-sectors. Growth in sales in these sectors, however, was offset by sharp declines in sales by the accommodation, cafes & restaurants, communication services and wholesale trade sub-sectors. Capacity utilisation in the services sector (which is not seasonally adjusted) increased by 0.1 points to 76.0%, which is slightly above the average level recorded since the start of 2010.

65 60
Diffusion Index

85 80 75
Sales Capacity Utilisation % (Unadj.)

55 50 45 40 35 30 25

Capacity Utilisation

OCT

65 60

70 65 60 55

US

usa services inDeX

55 50

54.2

45 40 35

Feb 10 Mar 10 Apr 10 May 10 June 10 July 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan11 Feb 11 Mar 11 Apr 11 May 11 June 11 July 11 Aug 11 Sept 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 June 12 July 12 Aug 12 Sept 12 Oct 12 Nov 12

Supported by:

NOV

30

neW orDers
On a seasonally adjusted basis, new orders contracted again in

65 60 55
Diffusion Index
Increasing

35 30 25
Feb 10 Mar 10 Apr 10 May 10 June 10 July 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan11 Feb 11 Mar 11 Apr 11 May 11 June 11 July 11 Aug 11 Sept 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 June 12 July 12 Aug 12 Sept 12 Oct 12 Nov 12

20

emPloyment anD Wages

On a seasonally adjusted basis, employment continued to contract

70 65 60
Diffusion Index Average wages
Increasing

Decreasing

November, though at a more modest pace. The new orders sub-index increased by 5.4 points to 46.3. The rise in the new orders index was driven by solid growth in new order levels in the health & community services, retail trade, finance & insurance and transport & storage services sub-sectors. Growth in new order levels across these sectors was offset by sharp declines in the communication services and personal & recreational service sub-sectors. Businesses noted that falling new orders stemmed from weakness in large parts of the construction and retail sectors, as well as some moderation in mining investment activity.

What is the australian Psi?

The Australian Industry Group Commonwealth Bank 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. More information can be obtained from the Ai Group website www.aigroup.com.au

50 45 40

in November, following the decline in sales and new orders seen in recent months. The employment sub-index increased by 4.2 points in November to 48.3. Only the finance & insurance sub-sector reported an increase in employment during the month (a sub-index above 50 points). In contrast, the employment sub-index declined sharply in the personal & recreational services and wholesale trade sub-sectors. On a non-seasonally adjusted basis, the average wages index increased by 0.6 points to 54.9 in November. The average wages index was supported by solid wage growth in the transport & storage and communication services sub-sectors, despite worsening conditions for sales, new orders and employment in these sub-sectors.

55
Employment

50 45 40 35 30
Decreasing

sPonsor statement
Commonwealth Bank is delighted to be the sponsor of the Australian PSI and is pleased to be able to provide the expertise of our Chief Economist Michael Blythe as the key spokesperson for the Performance of Services Index. The Commonwealth Bank is one of Australia's premier service organisations and with the majority of the Australian economy being services based we believe this important piece of research will add real value to the industry. It will provide insights and information that have not previously been available. We look forward to continuing to work with the Australian Industry Group to enhance and develop the Australian PSI.

stocks anD Deliveries

On a seasonally adjusted basis, stock levels (or inventories) in the

60 55 50
Diffusion Index Stocks Deliveries
Increasing Decreasing

services sector increased during the month after being broadly unchanged in October. The stocks sub-index of the Australian PSI decreased by 5.4 points in the month to 46.0. The solid fall in the index was driven by declining stock levels in the communication services and the finance & insurance sub-sectors. Stock levels continued to record solid growth in the retail trade, accommodation, cafes & restaurants, and transport & storage sub-sectors. On a seasonally adjusted basis, deliveries to the services sector contracted further in November, but very modestly. The supplier deliveries sub-index increased by 3.0 points this month to 49.9, just below the 50-point marker of expansion.

45 40 35 30 25
Feb 10 Mar 10 Apr 10 May 10 June 10 July 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan11 Feb 11 Mar 11 Apr 11 May 11 June 11 July 11 Aug 11 Sept 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 June 12 July 12 Aug 12 Sept 12 Oct 12 Nov 12

Feb 10 Mar 10 Apr 10 May 10 June 10 July 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan11 Feb 11 Mar 11 Apr 11 May 11 June 11 July 11 Aug 11 Sept 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 June 12 July 12 Aug 12 Sept 12 Oct 12 Nov 12

contact
Innes Willox Chief Executive Ai Group 03 9867 0111
Increasing

inPut costs anD selling Prices

On a non-seasonally adjusted basis, the input prices index fell 2.2

80 75 70 65
Diffusion Index Input Prices

australian Psi* november 2012

Nov 2012 47.1 sales 45.7 neW orDers 46.3 emPloyment 48.3 suPPlier Deliveries 49.9 inventories 46.0 inPut Prices 60.7 selling Prices 45.4 Wages 54.9 caPacity utilisation (%) 76.0
australian Psi

Oct 2012 42.8 37.6 40.9 44.1 46.9 51.5 62.9 44.7 54.3 75.9

Monthly Change 4.3 8.1 5.4 4.2 3.0 -5.5 -2.2 0.7 0.6 0.1

Direction Contracting Contracting Contracting Contracting Contracting Contracting Expanding Contracting Expanding

Results are based on the responses of around 200 companies. Forward seasonal factors were generated by the ABS in April 2012. * Australian PSI data is seasonally adjusted for sales, new orders, employment, supplier deliveries, inventories and input prices. ** Number of months moving in current direction.

If you would like to participate in this survey, please send your details to economics@aigroup.asn.au

Feb 10 Mar 10 Apr 10 May 10 June 10 July 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan11 Feb 11 Mar 11 Apr 11 May 11 June 11 July 11 Aug 11 Sept 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 June 12 July 12 Aug 12 Sept 12 Oct 12 Nov 12

points to 60.7 in November, and is now slightly below the average level recorded since the start of 2009. The average selling prices index continues to point to heavy discounting in the services sector. On a non-seasonally adjusted basis, the average selling prices index increased by 0.7 point, though at 45.6, remains well below the critical 50-point level separating expansion from contraction. The low level of the average selling prices index is consistent with recent weakness in Australian inflation more generally, with headline inflation recording just 2.0% p.a. in the third quarter of 2012 (and with even smaller price changes for some foods and other consumer goods).

60 55 50
Selling Prices

Michael Blythe Chief Economist Commonwealth Bank work 02 9118 1101 mobile 0417 886 027 Markit Economics www.markiteconomics.com
The Australian Industry Group, 2012 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.
AIG12434

40 35 30 25

Rate of Change Slower Slower Slower Slower Slower From expanding Slower Slower Faster

Trend** (Months) 10 5 5 10 5 1 117 13 40

Supported by:

Decreasing

45