Accelerating towards the cliff

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There is no doubt Australian data is in a cyclical upswing. Confidence measures and PMIs may not be top tier data but they are indicative nonetheless and show a strong bounce off recessionary activity levels underway in services, manufacturing and construction.

This morning I want to debate to what extent this is the result of a suddenly hot property market versus the election result and/or improving external conditions, as well as ruminate upon the likely growth trend.

Recent economic surveys have thrown up a range of clues. Roy Morgan Consumer Confidence data jumped hansomly leading into and just after the election but has now retraced a little:

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Business confidence, meanwhile, continues to soar in the NAB survey:

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It’s clear, however, that confidence and conditions have diverged in different sectors:

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Business conditions by industry. Conditions in finance/ business/ property lifted strongly in September (up 15 to +12 points), possibly reflecting the recent strengthening in demand for housing finance and improved sentiment in the residential property market. Construction conditions also rose sharply (up 10). The only industries to report weaker conditions in the month were transport & utilities (down 4) and recreation & personal services (down 2); transport conditions have turned down sharply over recent months, a worrying development given that this industry is often viewed as a bellwether of future demand. Overall conditions were strongest in finance/ business/ property (+12), followed by recreation & personal services (+10), despite falling a touch. All other industries reported negative activity readings in September, with conditions remaining especially weak in mining (-25) – largely reflecting very weak trading activity – manufacturing (-18), transport & utilities (-16), retail (-15) and wholesale (-12).

Business confidence turned positive for all industries in September; this is the first time in more than 2½ years that all firms have reported positive confidence readings. Recreation & personal services (up 15), mining and retail firms (both up 11) became much more optimistic in the month, while transport & utilities (down 2) was the only industry to report weaker sentiment, consistent with poor activity readings here. Overall, confidence was most positive in recreation & personal services (+15) and retail (+13), which may be looking forward to stronger household spending in response to a recent uplift in consumer sentiment. Confidence was also relatively strong in finance/business/ property and construction (both +12), which may be looking towards stronger housing activity following recent house price rises. The least optimistic industries were wholesale (+1) and transport & utilities (+2), consistent with weak indicators of future demand (forward orders) for these industries.

So, there is a smattering of housing related real activity but much of the bounce is still psychological, even if it has resulted in a little inventory cycle as I described yesterday:

…there are reasons to expect a sharp bounce here. Forward orders have rocketed:

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And restocking is taking hold:

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Regular reader will recall that I made a big deal of destocking over the past six months. Whether there is any real improvement in demand at this point really isn’t terribly relevant. We’re entering a restock on improved confidence and that translates into a quarter or two of better growth.

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Interesting and contradictory, the largest bounce was in WA suggesting that mining is also playing a role on the dollar correction.

Whether these general improvements can follow through to actual investment is going to depend upon whether capex and demand respond in a virtuous cycle. That in turn hinges upon how much spare capacity is in the system. The ANZ offers a nice chart showing the relationship:

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I suspect there’s plenty of excess capacity to soak up given the degree of slackness in the labour market, especially around under-employment. I would expect to see several quarters of improving man hours at least before we see any material bounce in jobs.

This is born out by the ANZ job ads report which has been showing some improvement in the second derivative but not much:

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Westpac also produces a handy “Jobs Index” which is composite of the business surveys’ employment components and continues to be dour:

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The Jobs Index peaked at 48.9 in Jul, easing back to 48.8 in Aug and 48.6 in Sep.

The Index is pointing to a period of modest softening in labour market demand over the next few months holding the annual pace below 1% to the year’s end.

Westpac confirms its forecast for rise in total employment of 20k in the Sept Labour Force Survey. The drop in participation, from 65.3% in June to 65.1% in July and then to 65.0% in Aug, suggest some sample volatility may have been at play over the last few months, hence our forecast for a 20k bounce in Sept.

We are forecasting a 0.1ppt rise in the participation rate which, given the trend rise in population, will generate a 37k lift in the working age population.

Given that we are forecasting a 20k bump in employment, the unemployment rate is forecast to rise to 5.9%.

The market median forecast is +15k (range flat to +45k) and 5.8% (range 5.7% to 5.9%).

So, some fresh activity, partly from housing, partly from mining and partly from a restock driven by the election result. In a normal cycle it would certainly be game on for recovery. As such I would not be surprised to see job losses stabilise for now.

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But alas, I remain doubtful that these improvements can build upon themselves into a virtuous cycle of economic growth next year. There are two reasons. The first is that the dollar is still far too high to increase tradable activity and investment. Second is the following chart from Goldman Sachs:

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Australian capital investment remains on track for a massive fall next year, and the year after, and the year after that. The current rebound in activity is paltry by comparison. We’ll see some offset in the modest housing construction bounce but not enough and any broader investment rebound will be dogged by over-capacity, at least for a time.

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In sum, a decent Christmas is in prospect on bouncing confidence. But the larger adjustment to the more competitive settings that will make a recovery sustainable remains.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.