Services sector expanding at fastest rate in 3 years, survey shows

The services sector expanded at its fastest pace in March in almost three years, The Business NZ-BNZ Performance of Services Index (PSI) shows. The results confirm similarly strong results from the PMI (Performance of Manufacturing Index) last week and suggest an economy recovering strongly enough for the Reserve Bank to start increasing interest rates. Here is more detail below from BNZ's economists.

Not to be outdone by its PMI cousin, the Performance of Services Index (PSI) also improved a good dollop in March, to cement a solid growth tone. While not a long-enough series to afford seasonal adjustment, the PSI, at 57.3, is nonetheless clearly stronger than it was a year ago, of 47.1. And it’s now akin to the level of about three years ago, before the recession took hold. Go the services sector. That the sector looks to be picking up the pace is not a great surprise. It’s what most analysts have been inferring in forecasting the economic recovery to gather strength this year. But it’s certainly good to see some clear signs of it coming through, when there is not overwhelming evidence of it in the hard data yet. And we say this noting the signs of wavering momentum even in the PSI earlier in the year. The clear improvement in the March PSI may not quite “rescue” Q1 activity growth, which we still expect to be moderate, in GDP terms. But the better tones go a long way to portending the stronger growth we’re picking for the June quarter, complementing what we’ve also seen in the PMI. This is reinforced by the fact the new-orders component of the PSI was a very perky 62.7 in March. That’s well above the 50 breakeven-mark and far more positive than it was a year prior, with 51.4 And with further signs that inventories are well under control – having been reduced quite aggressively through the heart of 2009 – the improving orders and demand are feeding directly into additional production. Indeed, the activity/sales component of the PSI surged to 62.9 in March, compared to 47.8 a year ago. In other words, the services sector is mirroring the positive inventory/orders/production dynamics we saw in last week’s Performance of Manufacturing Index. What the services sector doesn’t share with manufacturing, of course, is any great big hit to begin with, but nor the direct leverage to a robust Australian market and relatively low NZD/AUD. Such factors may yet force a divergence in the PSI and PMI over the coming year. However, for the moment, they are both in good slipstreams, it would seem. Picking into the industry components of the PSI, it was an almost unanimously positive pulse. The only negative was in the realm of cultural, recreational and personal services. The retail component of the PSI recovered very well, to a reasonable 52.3 in March, from 47.6, while accommodation cafes and restaurants ticked up to 54.2. These results fit with a couple of things. First, the bounce-back we’ve already witnessed for March electronic card transactions. Second, our view that March retail sales will recover from the unexpected softness reported last week for the month of February. Following retailing, the sector messages from the PSI only get stronger, with wholesaling, communication, property and business services, health and community, and the miscellaneous “other”, all particularly perky at around the 60 mark. If these are anywhere near what the seasonally adjusted results would be, then it’s a very positive signal. As a point of comparison, we note the services component of the latest Quarterly Survey of Business Opinion was not quite so strong for March. Nonetheless, it was upbeat, especially looking down the road. While reports of recent trading from QSBO service firms portrayed patchiness, expectations for the coming three months were close to the long-term norm. This, combined with the now more positive PSI, and the solid PMI, gives hope that GDP growth is set to look materially stronger in Q2 than seemed to be the case for Q1.