10min read
PREVIOUS ARTICLE Consumers skip shops, spend at... NEXT ARTICLE ASX loses momentum but still c...

Biggest lift in services sector activity in 29 months

Weakest new vehicle sales in 9 years
Services sector gauges; New vehicle sales

Services sector: The Australian Industry Group (AiG) Performance of Services Index (PSI) rose by 6.0 points to 52.5 points in May – the biggest increase since December 2016 and the highest level in six months. A reading above 50 indicates an expansion of services sector activity. The ‘final’ CBA/Markit Services Purchasing Managers’ Index (PMI) rose by 1.4 points to 51.5 points in May.

New vehicle sales: In May, 92,561 new vehicles were sold, down by 8.1 per cent over the year. In the twelve months to May, sales totalled 1,114,538 units, down 7.0 per cent on a year ago and the biggest annual decline in over nine years.

The services sector gauge highlights conditions in the sector as well as providing guidance on the economy more generally. The vehicle sales data provides guidance on consumer spending as well as conditions for the Autos and Components sector of the sharemarket.

What does it all mean?

• After a run of mediocre economic data releases, some positive news at last! Activity in Australia’s growth engine – the services sector – rebounded in May. The resolution of election uncertainty was identified by respondents in both the AiGroup and CBA surveys as a key contributor to a general improvement in trading conditions. In fact, business activity improved in the wholesale trade, business and property, hospitality and personal, recreational and other services sectors, according to AiGroup. And new orders and employment lifted.

• The CBA also noted that “business expectations about overall activity improved in May, with higher sales forecasts, planned company expansions and new marketing strategies all supporting optimism. Latest data showed sentiment improving to a three-month high”.

• But retail trade remains in the doldrums according to AiGroup. And part of the reason for this is the negative wealth effect from falling property prices. Cautious Aussies aren’t upgrading their wheels, preferring to pay down debt. In May, 92,561 new motor vehicles were sold, up from 75,550 sales in April. That said, rolling annual motor vehicle sales posted the biggest yearly decline in over nine years.

What do the figures show?

New vehicle sales

• The Federal Chamber of Automotive Industries reported: “The May 2019 market of 92,561 new vehicle sales is a decrease of 8,193 vehicle sales or -8.1 per cent on May 2018 (100,754) vehicle sales. May 2019 (26.8) had the same number of selling days as May 2018 and this resulted in a decrease of 305.7 vehicle sales per day.”

• “The Passenger Vehicle Market is down by 3,896 vehicle sales (down 11.9 per cent) over the same month last year; the Sports Utility Market is down by 2,036 vehicle sales (down 4.7 per cent); the Light Commercial Market is down by 1,904 vehicle sales (down 9.0 per cent); and the Heavy Commercial Vehicle Market is down by 357 vehicle sales (down 9.1 per cent) versus April 2018.

• Annual sales across states and territories: NSW (down 8.8 per cent); Victoria (down 7.0 per cent); Queensland (down 9.4 per cent); South Australia (down 7.6 per cent); Western Australia (down 7.5 per cent); Tasmania (up 5.4 per cent); Northern Territory (down 20.2 per cent); ACT (down 7.7 per cent).

Services Purchasing managers’ indexes

• The Australian Industry Group (AiG) Performance of Services Index (PSI) rose by 6.0 points to 52.5 points in May – the biggest increase since December 2016 and the highest level in six months. A reading above 50 indicates an expansion of services sector activity. Activity picked up across the employment, new orders and wages sub-indexes in May.

• AiGroup notes: “Increased certainty following the Federal election as well as strong mining activity and higher export demand were all noted by respondents to the PSI as having a positive effect on activity in May. Infrastructure construction along the east coast of the country continues to have a complementary follow-through to services businesses.”

• The ‘final’ Commonwealth Bank/Markit Services Purchasing Managers’ Index (PMI) rose by 1.4 points to 51.5 points in May. Any reading above 50 indicates expansion.

• CBA notes: “The middle of the second quarter saw improved business conditions in the Australian service sector. Business activity rose, supported by stronger order book growth. A sustained increase in backlogs of work encouraged firms to raise staff headcounts. Business confidence also remained elevated while inflationary pressure intensified in the latest survey period.”

What is the importance of the economic data?

• The Federal Chamber of Automotive Industries releases estimates of new vehicle 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.

• CBA and the Australian Industry Group (AiG) release surveys on the services sector each month. The Australian surveys are the local equivalents of similar surveys released for other countries. The services sector surveys are useful, not just in showing how the sector is performing, but in providing some sense about where it is headed. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• Last night Reserve Bank Governor Philip Lowe said that “a strong dynamic business sector is the best way of creating jobs.” With the Federal election out of the way and the Reserve Bank cutting interest rates to fresh record lows, trading conditions are expected to improve for Aussie businesses.

• Small businesses could benefit from lower debt repayments, better access to loans and a hoped-for pick-up in consumer spending. And those overseas-facing businesses, should eventually get tailwinds from a weaker Aussie dollar, boosting their competitiveness.

• New motor vehicle sales have declined so far this year in response the property downturn, tighter lending by financial institutions and weaker spending by households. That said, new motor vehicle sales could pick up due to proposed tax cuts, interest rate cuts and the end to election uncertainty.

• CommSec believes the Reserve Bank could cut interest rates again in August.

Published by Ryan Felsman, Senior Economist, CommSec