Services sector slows in July as wintry weather bites

The dip in sales activity "might not be all the weather's doing," says BNZ's Doug Steel.

New Zealand's services sector, which accounts for about two-thirds of the economy, weakened in July as wet and wintry conditions hampered business activity.

The BusinessNZ-Bank of New Zealand performance of services index (PSI) slipped 2.3 points to 56 in July from June, reaching its lowest level since April when activity was dented by a combination of school holidays and unseasonably wet weather. A reading of 50 separates expansion from contraction, and New Zealand's services sector has been in expansion since July 2010.

The PSI follows its sister survey, the performance of manufacturing index, or PMI, which showed New Zealand's manufacturing activity also slowed in July after particularly dismal winter weather. The PMI fell 0.6 points to a seasonally adjusted 55.4 in July, the lowest reading since January, although it has been in expansion with a reading above 50 in every month since October 2012. The composite index, which marries the two surveys, dipped 1.9 points to 55.8 on a GDP-weighted basis and dropped 1.2 points to 56.1 on a free-weighted basis

"The performance of services index (PSI) eased a couple of points in July," BNZ senior economist Doug Steel said in his report. "This suggests service sector growth cooled somewhat in July. The weather looks to have been, at least partly, to blame, as it was for the slight dip in the month's performance of manufacturing index (PMI) released last week. Many respondents to the PSI survey noted extreme weather as having a negative impact on their business this month. Consistent with disrupted logistics, supplier deliveries slowed the most across the major components. Despite the disruption, the PSI remains above its long term average of 54.4 indicating solid growth."

Four of the five PSI sub-indices weakened in July, with supplier deliveries dropping to 52.5 from 56.9, new orders/business falling to 60.1 from 63.8, stocks/inventories declining to 52.5 from 54.8, and activity/sales slipping to 55.5 from 59. Bucking the trend, employment lifted to 55.2 from 54.2.

BNZ's Steel noted that the dip in sales activity "might not be all the weather's doing", citing other factors such as a cooling housing market, some election uncertainty and an unwind from the Lions rugby tour in June.

"For now we are treating the slowing in sales growth as temporary, but await coming months' data for confirmation," he said. "We are encouraged by new orders remaining very healthy at over 60 and employment ticking higher."

Steel said ongoing strength in the PSI and PMI employment indicators adds to the case of a decent bounce back in official employment in the third quarter, following a mild dip in the second quarter.

While new orders eased in July for both the PSI and PMI, readings remain above their long-term average, he said.

"Recent strength in the composite new orders indicator bodes well for a pick-up in economic growth following a softer period at the end of last year and at the start of this year," Steel said. "On a smoothed three-month average basis, the recent buoyancy in new orders even suggest some upside risk to our near term GDP forecasts. But all considered, including the slower sales indicators noted above, we'll stick with our view that the economy will expand around 2.5 percent this year."