• The latest business and consumer surveys indicate that the economy was still sub-par at mid-2019;
• The RBA will prefer to wait and see how the rate cuts, tax reductions and lower $A is impacting the economy;
• Movements in the unemployment rate will be important for the rate outlook;
• But the next major domestic figure is the Q2 CPI numbers released at the end of this month;
‘Ring, ring, why don’t you give me a call'
In recent times there has been a lot of focus on some big picture economic numbers as to the reason why the RBA cut rates. The GDP, wages growth and CPI numbers were too low, the unemployment rate too high. And rightly so these numbers get most of the attention . They are the bottom line when it comes to judging economic performance. The problem is that these numbers (apart from unemployment) are only released quarterly. And all numbers contain some ‘noise’ that can muffle the underlying economic message.
Hence over the years there has been an increasing focus on using a wider range of data to sense-check the big picture numbers. These include a number of business and consumer surveys. Firms and households may not be following ABBA’s advice and eagerly waiting by their phones for a call to respond to a survey. But for economists, business and consumer surveys have become a valuable read.
What is the current message from the business and consumer surveys? The firms indicate that business conditions were below average in June. Although June was also the month of the first rate cut it is far too early to expect it to have had any economic impact. Firms reported that forward orders continue to slow. Not good news as this is one of the indicators that will point to an economic turnaround. With business conditions softening, firms are winding back their employment intentions. A soft economy is also no place for a firm to raise prices.
But where you sit depends upon what you see. Business conditions often differ between industries. The construction industry is doing it particularly tough. This has negative consequences for a number of manufacturer’s who are also reporting softer conditions. The good news is that service sector firms report that activity has bounced back somewhat over the past couple of months. This may partly reflect an upturn of activity in the finance sector and related professions as the bottoming in house prices has encouraged greater attendance at auctions. Industry has indicated there has been a rise of unit sales (although the index remains low). Although there might be some ‘green shoots’ of demand, excess supply means unit construction activity will weaken substantially over the next couple of years.
Consumers report a similarly cautious view about the economic outlook. No surprise that consumers are in no mood to hit the shops. And consistent with firms employment intentions, households report some softening in the jobs market. The good news is that consumers think that for the first time in a while housing in Sydney and Melbourne provides value (although they are less positive about housing in Hobart).
So the feedback from firms and consumers is that the economy is still travelling at a below-trend pace in mid-2019. The RBA will likely now sit back for a few months and see what impact the tax cuts, half percentage point cash rate reduction and the lower $A has on economic activity. If the economic momentum has not picked up towards year-end then the RBA will be tempted to validate current market pricing and reduce the cash rate by another quarter percentage point. The one proviso is that the CPI numbers late this month are not too weak.
These big picture numbers will always be important. But the business and consumer surveys provide an important check. For economists, looking at all the relevant information is ‘the Name of the Game’.
Business conditions continue to soften.
(SD from average, 3 month average)
Jobs growth will likely slow.
Business Employment Intentions
(SD from average)
Manufacturer's agree that conditions have been slowing.
Manufacturing Business Survey
(total, 3 month average)
Firms involved in unit construction are saying that things are looking like getting tougher.
Industry Views On New Orders
(3 month average)
This is because households are now seeing better value in Sydney (and Melbourne) property.
Consumer Views On Attractiveness Of Sydney Property
(6 month average)
One reason is that they no longer believe the jobs market is improving.
Consumer Concerns About Unemployment
And the forward indicators suggest no imminent improvement.
(SD from average)
And price growth will remain muted.
(SD from average)
Although the service sector reports some improvement.
Total Services Index
(3 month average, difference from average)
Although at least they are becoming more positive about sales.
Index Apartment Sales
Households have become a little more worried about their finances.
State Of Family Finances
Retailers will be hoping the tax cuts improves the mood of the consumer.
Time To Buy A Major Household Item
(6 month average, difference from average)
We live in interesting times!
Peter Munckton - Chief Economist