Australia service sector contracts in Sept-survey

SYDNEY, Oct 3 (Reuters) - Activity in Australia's services industry continued to contract in September, a survey showed on Wednesday, with firms complaining of weak demand from the struggling manufacturing and construction sectors.

The Australian Industry Group (AiG) and Commonwealth Bank of Australia's overall performance of services index (PSI) dipped 0.5 points to 41.9 in September, leaving it well below the 50-level that separates growth from contraction.

Weakness was evident in communication, transport & storage, and personal & recreational services sub-sectors. In contrast, sectors exposed to household spending reported improved conditions in the month, suggesting lower interest rates were feeding through to consumption.

After cutting rates in May and June, the Reserve Bank of Australia (RBA) eased further this week to take rates to a three-year low of 3.25 percent.

Health & community services and accommodation, cafes & restaurants were the two sectors to report expanding activity during September.

"Some of the consumer facing areas have firmer growth, with household incomes lifted by Government assistance and lower interest rates," said CBA chief economist, Michael Blythe.

"We expect another RBA rate cut in coming months which could further lift household disposable incomes."

The survey of around 200 companies found sales overall remained depressed in September, with that index edging up only modestly to 37.8. The measure of new orders dipped further to 36.9, pointing to more weakness ahead.

The news on employment was slightly more encouraging as that index firmed to 48.4, with health, tourism and eating out again the growth sectors.

Retail inflation pressures looked contained with the index of selling prices stuck down at 43.7. That was well below the measure of input prices at 66.8, pointing to considerable pressure on profit margins.

The overall index has tended to underestimate the resilience of service activity across the economy. It was in contractionary territory for most of the first half of the year, yet official figures on gross domestic product show actual household spending on services stayed solid.

(Reporting by Wayne Cole)

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