The BNZ Capital – Business NZ Performance of Services Index (PSI) stood at 56.0 in November, up 6.1 points from October and 2.8 points from September. Looking year on year, the PSI in November 2009 stood 8.7 points above that recorded in November 2008 (47.3).

Over the last three months the PSI has averaged 53.0 indicating that overall service sector activity is beginning to slowly show signs of expansion. A PSI reading above 50.0 indicates that the service sector is generally expanding.

All of the five indexes that make up the PSI recorded an expansion in activities between October and November. This is the first time since February 2008 that all sub-indexes have been in expansion mode. After dropping 9.6 points between September and October, the activities/sales index rose 10.3 points between October and November to sit at 58.7. This is the largest increase for this index this year.

The new orders/business index also markedly improved this month, moving 8.5 points from 52.6 in October to 61.6 in November. The three monthly average for new orders/business is now 57.4, which is the highest average value since February 2008.

The three other indexes had mixed results with activity recording expansion but at a weaker level. Deliveries (54.3) were up 5.2 points between October and November, reflecting the increase in new orders and activities/sales. The index for finished stocks (50.6) was also up 3.6 points on last month’s results. Employment (51.2) expanded for the second month in a row, but this expansion is still very weak, up just 0.8 points. Sitting at 49.9, the three monthly average for the employment index recorded its highest result since April 2008. However, despite this improvement, employment has been in contraction for 20 months now.

Results in the various service sectors were generally positive this month. As would be expected, given the slight improvement in overall activity levels, the proportion of positive comments increased from 49.8 percent in October to 54.5 percent in November.

Within the sectors, the transport and storage sector led the way this month sitting at 61.4, up from 55.2 in October, followed by health and community services (59.4). However, the fortunes of the sectors are highly variable. Last month, retail trade sat at 53.6, this month the sector dipped below 50 to sit at 49.6. In contrast, the property and business services sector moved up from 48.7 in October to 52.9 in November.

This improvement in service level activities was also reflected in the four main regions monitored; with all four regions recording a value above 50 in November. The strongest level of expansion recorded between October and November was in the Otago region, up 11.9 points from 47.5 in October to 59.4 in November. The Northern (54.8), Central (59.3), and Canterbury/Westland (56.0) regions all showed improved levels of expansion in November.

Comparing three monthly averages year-on-year, the change in activity in the Otago and Northern regions are substantial. However, service level activities in the Central region only improved by 1.0 point while the Canterbury region had a 0.7 point improvement.

Looking ahead, while business and household confidence has improved, actual business and consumer spending remains weak. Household wealth is still down compared to pre-recession levels, and households are continuing to be relatively cautious. This will impact on the service sector. However, the monetary policy statement released by the Reserve Bank of New Zealand (RBNZ), is forecasting GDP to increase by three percent in 2010 and four percent in 2011.

In terms of employment, many firms have retained workers so any increase in demand for services should initially be met by increasing the hours of existing staff rather than employing new staff. So in the near term, employment growth in this sector could be muted.