RTTNews - Australia's services sector activity contracted for the 14th consecutive month in May, although the pace slowed from that recorded in the first quarter, the latest report from the Australian Industry Group and Commonwealth Bank said Wednesday.

The Performance of Services Index rose 0.1 points from April to 39.9, but remained below the threshold level of 50. A reading above 50 indicates expansion, while a reading below 50 signals a contraction.

During the month, the sales index fell to 39.1 from 39.9, while the capacity utilization decreased to 72.2% from 75.8%. New orders contracted for the 14th consecutive month, with the index declining 2.7 points to 34.9. Inventories also continued to drop, with the index decreasing 1.6 points to 40.9.

However, the employment index improved in May, rising 4.3 points to 46, the highest reading in the last eight months. This suggests that jobs shedding in the current downturn is likely to turn out to be more moderate than in the recessions of 1990/91 and 1982/83 when unemployment rose above 10%, the Commonwealth Bank's Senior Economist John Peters noted. On the other hand, the wages index fell modestly, declining 1.9 points to 48.4.

Meanwhile, the deliveries index contracted for the 14th consecutive month, but the index rose 0.4 points to 38.6. The rise in input costs eased to its slowest pace since December 2003, with the index dropping to 58.6 from 60.4. Selling prices declined for the third consecutive month, with the index falling 2.9 points to 44.7.

Commenting on the latest PSI data, Peters said, Sluggish services sector activity is consistent with contracting activity in the non-farm economy (97% of total economy) since the middle of 2008. The heartening news is that the pace of decline in services sector activity has abated in Q2 from strongly contracting activity in QI 2009.

This brighter outlook has no doubt been driven by sharply lower mortgage rates and the Federal Government's stimulus packages, including the first home owners' scheme, which have helped boost activity, particularly in the retail, wholesale trade and property sectors, Peters added.

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