• The services sector is going backwards. The Performance of Services index fell from 50.7 to 46.2 in November. Any reading below 50 suggests that the services sector is contracting. The services sector has contacted in nine of the past 11 months in 2010.
• New vehicles sales rose in November. There were 87,342 new motor vehicles sold in November, up 1.8 per cent on a year ago. Sales of four-wheel drive vehicles hit record highs over the past year.
• Car affordability is close to the best levels in 34 years. CommSec estimates that it takes the average worker just over 31 weeks of wages to buy a new Ford Falcon.
• CommSec has estimated that vehicle sales rose 1 per cent in seasonally adjusted terms in November after falling by 0.6 per cent in October.

What does it all mean?

• Had it not been for a modest lift in car sales, economic data over the past few days would have been uniformly dreadful. And while we estimate that car sales rose in seasonally adjusted terms in November, the gain was modest with an estimated lift in sales of around one per cent.
• Certainly the services sector is depressed, impacted by higher interest rates, a stronger currency and the conservative buying behaviour of consumers and businesses. The Reserve Bank has a habit of applying one too many rate hikes, and that appears the case with the decision to lift rates in November.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Input costs jumped sharply in November but the reading of selling prices actually fell. Business margins are constrained, thus depressing profitability.
• A period of interest rate stability would clearly help the situation. If the Reserve Bank stayed on the interest rate sidelines until mid 2011, consumers may be tempted to open their wallets again.
• The car market is in reasonable shape. While sales are rising, the gains remain quite modest as savvy consumers and businesses weigh up their options.
• Clearly Australia’s love affair with the four-wheel drive shows no signs of ending. One in every four vehicles sold is a 4WD vehicle and that ratio could lift to one in three over 2011. The usual deterrent of 4WD purchases is the rising cost of fuel but petrol prices have actually been reasonably flat over 2010. And Aussies just love the versatility of the four-wheel drive or sports utility vehicle.

What do the figures show?

Performance of Services index

The Performance of Services index fell from 50.7 to 46.2 in November. It was the ninth time in the past 11 months that the PSI has been below 50. Any reading below 50 indicates a contraction of activity.

The property and business sector was the only one of the nine sectors to record growth (reading above 50) in the latest month.

Sales, orders and employment all fell in the month with each now below 50, suggesting weakening activity. In fact only input prices and wages have index readings above 50.

Profitability is clearly under pressure with the index of selling prices falling 1.6 points to 49.0 and input prices up 4.3 points to 64.4.

New vehicle sales

The Federal Chamber of Automotive Industries reported that 87,342 new motor vehicles were sold in November, up 1.8 per cent on a year ago. Passenger car sales were up 5.0 per cent on a year ago, 4WDs were up 13.3 per cent, heavy commercial vehicles were up 6.2 per cent but light commercial vehicle sales were down 18.9 per cent. ·  Over the past twelve months, 1,037,695 new vehicles were sold – the highest annual total in 25 months – but still below the record high of 1,068,301 vehicle sales in the year to June 2008.

CommSec estimates that vehicle sales rose 1 per cent in November in seasonally adjusted terms – the third modest gain in four months.

Over the year to November a record 236,346 four-wheel drive vehicles were sold, accounting for a record 28.7 per cent of all combined passenger and 4WD vehicle sales.

CommSec estimates that car affordability is close to the best levels since the 1970s. It takes someone earning the average wage just over 31 weeks of wages to buy a new Ford Falcon. Five years ago, the average worker would have needed to work an extra month to afford the same car.

What is the importance of the economic data?

The Australian Industry Group and Commonwealth Bank release the Performance of Services index each month. The PSI is a key indicator of conditions in the services sector – includes retailing, finance, hotels and cafes.

The Federal Chamber of Automotive Industries release figures on new car sales at the start of each month. The data is useful in gauging consumer spending behaviour.

What are the implications for interest rates and investors?

Overly optimistic analysts have some soul searching to do. Retail spending is slumping, the services, manufacturing and construction sectors are going backwards and the non-farm economy actually contracted in the September quarter. The mining sector is not coming to the rescue of retailers or builders – for that we have to rely on a period of stable interest rates to allow some positive momentum to take hold.

The car market is in reasonable shape, but we can’t say the same for many other businesses that are reliant on consumer spending. Holding in the car market’s favour are lower prices, serving as an attractive inducement to car buyers.

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