Activity in the service sector contracted in July, as government stimulus fades, according to a report.

The Australian Industry Group/Commonwealth Bank performance of services index (PSI) edged down 2.2 points in July to 46.6 points.

It was the PSI's third straight month below the 50 point level separating expansion from contraction.

The data is in line with the weaker conditions felt in services over the first half of the year, the report said.

The tightening of consumer purse strings was seen across the sector, with sales and deliveries both slumping at a faster pace in the month, according to AI group chief executive Heather Ridout's statement on Wednesday.

"Both consumer-related services and business services fared poorly in July reinforcing the picture of a gradual and uneven recovery."

"Caution from consumers and businesses is preventing a more convincing and widespread recovery from taking hold," she said.

Personal and recreational services saw a significant decline after a solid June result, while retail trade continued its poor track.

Finance and insurance services was the only sub-sector to grow in July.

The sales sub-index declined 5.0 points in the month, while the deliveries sub-index contracted 2.9 points.

Employment across services in July stayed in positive territory at 50.4 points.

Tasmania was the only state to post an expansion in services activity.

"With private sector demand yet to assert itself as a sustaining feature of the recovery, the Reserve Bank's decision yesterday not to raise interest rates was clearly the right call and the RBA should take a wait and see approach for some time yet," Mrs Ridout said.