New Zealand's services sector contracted for the first time in four months in October as sales fell over the month, the latest BNZ Capital-Business NZ Performance of Services Index (PSI) showed.

The PSI recorded 49.9 in October, signalling a very slight contraction in activity in the sector. A score above 50 represents expansion, while a score below 50 represents contraction. October's result was down from 53.2 in September, but up from 48.7 in October 2008. The PSI is not yet seasonally adjusted.

The 'activity/sales' component of the PSI fell from 58 in September to 48.4 in October.

BNZ economists focused their commentary on last week's retail sales data, and the "binge" on appliance retailing which "is hardly supportive for domestic production more generally":

The only real surprise in last Thursday's retail trade figures was the 0.5% increase in ex-auto volumes, when (unpolled) expectations for this core measure seemed about as tepid as the headline retail results proved to be. But before anyone gets excited about this we should note the 0.5% was propped up by a whopping 6.5% increase in spending on appliances. And on signs of discounting to boot, rather than reflecting any housing sector impact "“ as categories such as hardware and furniture were hardly strong.

While good for imports, and the distribution sector, the binge on appliances is hardly supportive for domestic production more generally. In this respect, it's worth noting that real spending on appliances is now around 18% higher than it was at the end of 2007 "“ about when the NZ recession began. The priorities of New Zealander consumers would seem clear.

And we say this noting the recent surge in the exchange rate will be making imports, more generally, even more "competitive" for the foreseeable future, which will be as good for consumers as it is bad for local producers competing with imported product.

This highlights the other important channel through which a strong exchange rate is ultimately a drag for the local economy, while engineering imbalances, as it reinforces the more direct, and higher-profile, headwinds for exporters.

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While we weren't completely surprised by the increase in appliance spending, we were certainly stunned by the extent of the rise in their volume. And most of this was because prices were much weaker than the CPI version of appliance prices implied.

To wit, the CPI-based price of appliances slipped 0.2% in Q3, to be 1.6% higher than a year ago. But the retail deflator for appliances dropped 1.3% in the quarter, to be 2.6% lower than the same period a year ago. It's like chalk and cheese.

While there may well be methodological differences to appreciate here, we think the retail version of appliance prices makes more sense. We need only walk down the main street, read the newspaper, turn on the latest-model flat-screen television, or surf the web via the snazziest PC, to get the impression there's still a lot of discounting out there in retail land. The buy now, pay later, interest-free deals remain in full force, it would seem.

And beyond the appliance stores, too. It would appear that retail stores of many varieties are still earnestly trying to shift product, partly to clear the decks before the all-important festive season arrives.

In keeping with our perception of ongoing hesitation in the industry, we judge that, excluding appliances, retail volumes in the September quarter fell 0.4% in core terms, and dropped 0.6% overall. This squares with the impression we got of the latest retail figures, of the sector remaining patchy, in general, with half of the store-types registering declines.

The other reason to remain guarded about the latest retail data was that they failed to keep pace with population growth, which is picking up (on the back of migrant departures falling by more than arrivals). It's now running at about 0.4% per quarter, in working-age population terms.

And so per capita retail spending was about flat in nominal terms in Q3 and was down 0.2% in real terms. Excluding appliances and the volatile auto categories, per capita retail spending volumes dropped about 0.7% in the September quarter, to be 1.3% lower than a year ago.

Nonetheless, we remain of the view (of PSI included) that an underlying pick-up is in train. With last week's retail data, overall, being broadly in line with our expectations, the technical picture still looks set for a reasonable expansion in the Q4 statistics "“ as the improvement in such things as consumer sentiment, and the housing market, have been pointing to. But it's nothing that looks particularly strong at the moment "“ as October's flattish electronic card transactions have already made plain.