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Record SUV sales; Buoyant services sectorNew vehicle sales; Consumer sentiment; Services gauges
New vehicle sales: According to the Federal Chamber of Automotive Industries (FCAI), annual new vehicle sales eased from 1,201,104 units in the year to April to 1,198,957 units in the year to May. Still, annual sales are up by 2.1 per cent over the year.
Record high new SUV sales: Annual SUV sales hit a record high of 485,887 units in May. SUVs now account for 40.5 per cent of all new vehicles sold.
Consumer sentiment: The weekly ANZ/Roy Morgan consumer confidence rating fell by 1.0 per cent to 116.5. Confidence is still up by 3.2 per cent over the year and above the average of 113.8 since 2014.
Services gauges: The CBA Purchasing Manager’s Index (PMI) for the services sector rose from 55.2 points in April to 55.9 points in May. The Australian Industry Group (AiG) Performance of Services Index (PSI) 55.2 points in April to 59.0 points in May – the highest level in over 13 years. Readings over 50 signify services sector expansion. 
What does it all mean?
Aussies love their SUVs. From ‘Soccer Mums’ to tradies we’ve embraced SUVs in a big way. There are now around 130 models sold in Australia. Varying sizes and models, improved fuel efficiency, rising comfort levels, superior driveability, better handling and performance are behind the surge in sales.
New SUV sales reached record highs last month and sales now account for over 40 per cent of all new motor vehicles sold in Australia. And sales of luxury SUVs are even supplanting the equivalent sedan for some wellknown models. Mercedes, BMW, Audi, Jaguar, Lexus, Porsche and even Rolls-Royce have all embraced the growing premium buyer demand in this segment. Passenger vehicle sales remain under pressure as consumer demand wanes.
While near-record car sales in May imply a healthy consumer backdrop, the latest weekly sentiment survey from ANZ and Roy Morgan provides suggests that Aussie households remain cautious.
Petrol prices eased last week but remain elevated at around $1.50 per litre as we approach the Queen’s Birthday holiday weekend around the country.
Also weighing on sentiment is negative news headlines around home price declines in Sydney and Melbourne. Sharemarkets also declined last week with the ASX200 index down by 0.7 per cent as geo-political turmoil in Italy and trade war concerns roiled global markets. 
The latest services gauges confirm the healthy state of Aussie businesses. The services sector is Australia’s growth engine and largest employer. Income from education and tourism are growing on strong Chinese demand. The AiGroup survey is at its strongest level since December 2004.
What do the figures show? New vehicle sales
According to the Federal Chamber of Automotive Industries (FCAI), there were 100,754 new vehicle sales in May, down 2.1 per cent over the year. In the twelve months to May, sales totalled 1,198,957 units, down from 1,201,104 units in April, but up 2.1 per cent on a year ago.
The FCAI reported: “The May 2018 market of 100,754 new vehicle sales is a decrease of 2,147 vehicle sales or -2.1 per cent on May 2017 (102,901) vehicle sales. May 2018 (26.8) had the same number of selling day as May 2017 and this resulted in a decrease of 80.1 vehicle sales per day.”
By segment: “The Passenger Vehicle Market is down by 6,056 vehicle sales (down by 15.6 per cent) over the same month last year; the Sports Utility Market is up by 3,344 vehicle sales (up by 8.4 per cent); the Light Commercial Market is down by 111 vehicle sales (down by 0.5 per cent); and the Heavy Commercial Vehicle Market is up by 676 vehicle sales (up by 20.9 per cent) versus May 2017.”
By model: “The Toyota Hilux remained Australia’s topselling vehicle in May, posting 4,385 sales. In second place was the Ford Ranger with 3,674, followed by the Toyota Corolla (3,120), the Hyundai i30 (2,779) and the Mazda3 (2,586).”
States/Territories: NSW sales 32,523 (down by 5.9 per cent on a year ago); Victoria 28,104 (down by 3.3 per cent); Queensland 21,143 (up by 2.3 per cent); South Australia 6,087 (down by 0.8 per cent); Western Australia 8,484 (up by 4.0 per cent); NT 1,188 (down by 6.9 per cent); ACT 1,568 (up by 4.4 per cent).
Consumer Sentiment
The weekly ANZ/Roy Morgan consumer confidence rating fell by 1.0 per cent to 116.5. Confidence is still up by 3.2 per cent over the year and above the average of 113.8 since 2014.
Three of the five components of the index fell in the latest week:
* The estimate of family finances compared with a year ago was down from +7.1 to +5.0;
* The estimate of family finances over the next year was up from +22.5 to +26.5;
* Economic conditions over the next 12 months was down from +10.5 to +5.9;
* Economic conditions over the next 5 years was down from+12.4 to +8.6;
* The measure of whether it was a good time to buy a major household item was unchanged at +36.2.
The measure of inflation expectations 2 years ahead fell from 4.7 per cent to 4.5 per cent.CBA Purchasing Managers Index for Services
The CBA Purchasing Manager’s Index (PMI) for the services sector rose from 55.2 points in April to 55.9 points in May – the highest level in 10 months. Readings above 50 signal expansion of the services sector.
The CBA reported: “The strongest reading on the services sector in 10 months is a particularly welcome result. Activity has accelerated and confidence is elevated which bodes well for both employment and output growth. Not for the first time, firms have reported a lift in input costs, which accelerated to a five-month high. Output prices are also moving higher, though not at the same rate. This suggests some margin compression. Firms will look to pass this on in time if demand remains firm. As such, we may see consumer inflation lift a little from here.” AiGroup Performance of Services Index
The Australian Industry Group (AiG) Performance of Services Index (PSI) rose from 55.2 points in April to 59.0 points in May – the highest level in over 13 years. PSI results above 50 points indicate expansion, with higher numbers indicating stronger rates of growth.
At the sub-index level, new orders (up by 8.7 points to 65.0 points); sales (up by 4.3 points to 60.1 points) and employment (up by 0.6 points to 59.2 points) all lifted during May, but stocks fell (down by 6.8 points to 45.4 points).
Most key price measures lifted in May: selling prices (up by 1.4 to 52.9 points), input prices (up by 9.7 to 66.8 points) and wages (up by 4.4 to 64.6 points) all strengthened during the month, although capacity utilisation fell by 0.5 points to 81.9 points.
AiGroup notes: ‘The predominantly business-oriented sub-sectors such as property, finance and transport reported solid demand from customers in construction and manufacturing. The more discretionary, mainly consumer-oriented sub-sectors remained relatively weaker in May. Retail trade contracted again, as did hospitality (trend).’
What is the importance of the economic data?
The Federal Chamber of Automotive Industries releases estimates of car sales on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.
The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
The CBA Purchasing Manager indexes (PMIs) and Australian Industry Group (AiG) Australian Performance of Services Index (PSI) for services and manufacturing are released each month. The Australian PMIs are the local equivalents of similar indexes released for other countries. The PMIs are amongst timeliest economic indicators released in Australia. The PMIs are useful not just in showing how the sectors are performing but in providing some sense about where they are heading. The key ‘forward looking’ components are orders and employment.
What are the implications for interest rates and investors?
Strong new vehicle sales highlights the positive environment for the automotive sector. SUV sales are at record highs, highlighting a growing preference by Aussie consumers for these vehicles in preference to traditional 4- door passenger sedans. In its 2020 strategy Ford announced that it would focus solely on SUVs and commercial vehicles in North America. Sedans are under threat. New Ford Falcons are all but extinct in Australia.
Business surveys and services gauges continue to note high demand for skilled workers and upward pressure on wages. AiGroup said today [that] “pressures appear to be increasing as skill shortages emerge in higher-skill occupations and in business-oriented sub-sectors”.
At this point the wage pressures aren’t broad-based. The 3.5 per cent increase in the national minimum wage by the Fair Work Commission last week may lift wages growth a little.
But we need to see economic growth near 3 per cent and the unemployment rate below 5 per cent to see sufficient tightening of the labour to generate upward pay pressures on employers.
CommSec expects no change to official interest rates until February 2019.
Published by Ryan Felsman, Senior Economist, CommSec