Services sector activity drop confirms lower GDP growth outcome

The three-month moving average has eased to its lowest level in more than five years.
BNZ senior economist Doug Steel says new orders remain robust but employment growth has stalled.

Annual growth in the services sector could slip below the 2% GDP rate in late 2018 from above 3% earlier in the year, the BNZ-BusinessNZ Performance of Services Index (PSI) for August suggests.

The PSI, which measures actual economic activity, eased to 53.2 from July’s 54.8 and is now below its long-term average of 54.5 (a PSI reading above 50.0 indicates expansion while below 50.0 a decline).

The three-month moving average has eased to 53.6, well below last year’s average of 57.1 and its lowest level in more than five years.

Sales, orders and employment
BNZ senior economist Doug Steel says despite the generally subdued survey results, some positives are apparent. New orders remain robust at 58.8, down from July’s 60.0, but offers some hope for improvement in the current activity/sales index that wilted to a below-average 53.8.

“There was no such equivocation in the employment index, which has been flat for three consecutive months at 49.9. This implies a clear stalling in service sector employment over this period.”

The reason for this is unclear, he says.

“It might be a lack of labour demand as pessimistic businesses hunker down, although that doesn’t quite square with generally positive employment intentions.

“It might be related to an increase in the cost of labour (including a lift in the minimum wage) or perhaps related to uncertainty over labour relations policy. Or it might be that the difficulty firms have long reported in finding staff is now materially restricting expansion.”

Housing and retail
Indicators of the housing market and spending have been mixed of late, Mr Steel says. For example, August’s REINZ housing report showed varied regional performance.

While overall house sales were 3.1% higher than a year ago, that figure is flattened by last year’s softer patch heading into the election.

“The level of home sales is modest, rather than weak, and consistent with low single-digit annual house price inflation,” Mr Steel says. “A tick higher in house sales is also consistent with a modest accelerating in spending on durable goods – as we have seen in electronic card transactions data for August.” This was part of a general pickup in spending, probably supported by the government’s fiscal stimulus.

“It fits with the PSI for retail lifting to an unadjusted 54.3 (making the dip in July look like just an unwind from a very strong June).”

Manufacturing activity rises
The slower expansion of the PSI matches that of the complementary Performance of Manufacturing Index (PMI), 
BusinessNZ chief executive Kirk Hope says.

“Looking at the sub-indices, the two key ones involving activity/sales (53.8) and new orders/business (58.8) both decreased in August, with the former at its lowest point since February," he says. 

“For the third month running, employment (49.9) remains stubbornly stuck on a figure that represents all but no change while stocks/inventories (51.8) showed some improvement from July. On a positive note, the proportion of positive comments in August (56.0%) recovered somewhat from the decrease in July (53.8%)." 

The PMI, released on Friday, rose 0.8 points to 52.0 in August but below the long-term average of 53.4. 

While production (52.6) returned to expansion and new orders (53.2) also improved from July, employment (48.1) fell back into contraction to its lowest level since August 2016.  Deliveries (54.3) remained largely unchanged while finished stocks (51.4) decreased by 2.1 points.