Services sector still expanding, but retail weak as consumers save (Update 1)

The BNZ- Business NZ Performance of Service Index (PSI) rose 0.6 points to 53.7 in February from January, which was the index's first monthly improvement since November and was well above the 46.3 level seen in January a year ago. (Update 1 includes Performance of services index chart) An index level above 50 implies expansion, but the strongest sectors were health and community services, while retail and transport were weak as consumption remains subdued. Here's the full results. Here's comments below from BNZ economist Doug Steel, in particular his view that consumers appear to be saving more and that there is little obvious pressure for the Reserve Bank to hike the Official Cash Rate immediately.

We are starting to wonder if some of the weakness reflects households materially increasing their savings rate (at long last). We say this with signs that employment indicators are improving and consumer confidence has strengthened to a relatively strong level. This is not usually the backdrop to falling spending. The idea that saving is increasing certainly fits with anecdote that many households have not dropped their mortgage repayments as much as the big fall in mortgage rates has afforded, implying increased paying down of debt. While a pain for shopkeepers, this is fundamentally a good thing in respect of desired de-leveraging. The other thing we (continue to) wonder about is how much of the disappointing trend in nominal spending reflects aggressive discounting by retailers as opposed to poor volume per se. This, by the way, is a gentle reminder that the retail sector is probably not the place to look for the leading edge of New Zealand’s GDP recovery. That mantle seems to be migrating to the likes of manufacturing, the broader services sector, and even some parts of the construction sector. As for today’s survey, while the main indicators are in positive territory, there is a hint of a plateau developing over recent months. Certainly, across all the sub indices the movements between January and February were all well within the usual monthly volatility. But even back to November, movements have been within relatively tight ranges. So, while service sector activity continues to expand, the acceleration we saw through the mid-to-latter part of 2009 may be tapering off. This would tie in with our view that the economy as a whole likely accelerated in Q4 2009 and maintained, rather than add to, this momentum into the New Year. The ongoing slack in the labour market means no immediate need to lift interest rates from record lows. This was the clear message and (non) action from the Reserve Bank in its latest Monetary Policy Statement released last Thursday. Indeed, embedded in the Bank’s forecast was an expectation of activity accelerating and with this interest rates may start to rise from around the middle of 2010.