Australia’s services sector picks up: CBA ‘flash’ PMI

Tax cuts, income tax refunds and rising house prices appear to be lifting business activity but more stimulus needed, say CBA economists.

Business activity in the Australian private sector returned to growth in September due to an improving picture among service providers, according to early data for the month released today by CBA.

Commenting on the latest ‘flash’ CBA Composite Purchasing Managers Index (PMI) for September, Senior Economist Gareth Aird said: “There are early signs that the combination of cash rate cuts, income tax refunds and rising dwelling prices is having a positive impact on the services sector.”

The rise in activity in the services sector aligns with the September edition of CBA’s Household Spending Intention series, released last week.

In September, the services index rose to 52.5, up from 49.1 in August – with readings below 50.0 signalling a deterioration in business activity on the previous month. The rise in activity for the services sector reflected a faster pace of new order growth.

Australia’s manufacturer sector moved into contraction territory in September, posting its first decline in health since the PMI started in May 2016. In September the manufacturing index dropped to 49.4, down from 50.9 in August.

Mr Aird said the divergence in the readings on the manufacturing and services sectors is somewhat unusual, though not unprecedented.

“The dip in the manufacturing reading was a touch disappointing, particularly given the ongoing weakness in the Australian dollar. It may be the case that the raft of so-called geopolitical tensions are having a dampening impact on the local manufacturing sector,” said Mr Aird.

“Overall, it is a move in the right direction, but the level of the headline index continues to imply that the economy could do with more stimulus. With the RBA cash rate at record lows, the case for fiscal stimulus remains,” Mr Aird added.

Why are PMIs important?

The PMIs are important because they cover key areas of the economy.

They are part of the global suite of PMI releases published by IHS Markit.

Manufacturing activity tends to be cyclical in nature, so turning points in the CBA Manufacturing PMI can provide early warning signals of turns in the business cycle more generally.

Services activity tends to be less cyclical and is on a long‑run structural uptrend, so the level of the CBA Services PMI is important when assessing the resilience of the Australian economy more broadly.

How are the PMIs calculated?

The PMI surveys cover senior purchasing managers in 400 Australian companies in the manufacturing and service sectors each month. The survey began in May 2016.

Manufacturers are surveyed each month on how output, orders, jobs, delivery times and stocks have changed relative to the previous month.

The survey results are presented as diffusion indexes. These indexes have leading indicator properties and show the direction of change. A reading above 50 indicates expansion. The further above (below) 50, the stronger the expansion (contraction).

The CBA PMI surveys cover manufacturing and services, or close to 75 per cent of GDP [gross domestic product].

The ability to access 80‑85 per cent of survey results earlier means that reliable ‘flash’ estimates can be published sooner. It brings the Australian survey into line with flash estimates for the Eurozone and Japan.

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