Record high employment conditionsBusinesses shrug off lower home pricesNAB survey; Home prices; Consumer sentiment
Business conditions & confidence eases: The NAB business conditions index eased from +13 points to +11 points in November. Business confidence fell from +5 points to +3 points.
Solid employment intentions: The NAB business conditions employment sub-index lifted from +7 to +9 points in November. And the 12-month moving average rose from +9.93 points to +10.04 points in November – a record high.
Impact of falling home prices on businesses: Around 75 per cent of surveyed respondents reported that lower Melbourne and Sydney home prices had no impact (neutral) on business conditions.
Home prices: The Bureau of Statistics reports that Australian home prices fell by 1.5 per cent in the September quarter to stand 1.9 per cent lower over the year.
Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.5 per cent to 117.7. The index is comfortably above the average of 114.3 held since 2014, and above the longer term average of 113.0 held since 1990. 
What does it all mean?
Aussie business conditions continue to ease from record high levels, but remain elevated. Conditions for most industries are above average with only retailers reporting deteriorating conditions. Retailers have remained under pressure primarily due to intense e-commerce and online competition, which is pressuring profit margins.
Employment growth remains key to the economic and interest rate outlook. Aussie businesses are continuing to hire workers and wages are lifting gradually. In fact, the rolling 12-month average of the employment conditions index was at a record high in November, implying solid jobs growth of around 20,000 on a monthly basis over the next six months orso.
Wage costs, while still low, were identified as the second most important factor influencing business conditions in the NAB business survey in November. Wage costs are rising for over 60 per cent of businesses in the Personal and recreational services industry. And almost 70 per cent of Miners are finding it difficult to find suitable labour.
Capital city home prices are mixed. Prices are falling in Sydney, Melbourne, Perth and Darwin, but have lifted in Adelaide, Brisbane, Canberra and Hobart over the year to September. But businesses appear unmoved. In fact, around 75 per cent of surveyed NAB business respondents report no impact from falling Sydney and Melbourne prices.
The ANZ-Roy Morgan consumer confidence gauge has averaged 118.5 points during 2018, which is well above the long-run average of 113 points. And sentiment has recovered from recent lows of 112.3 points (October 21), following the Wentworth by-election. At this stage, households remain resilient, supported by continued job gains and record low interest rates. And annual retail spending in Victoria is the best in four years, despite falling home prices in Melbourne. But falling sharemarkets and a correction in Sydney home prices may restrain household consumption next year.
What do the figures show?National Australia Bank Business Survey
The NAB business conditions index eased from +12.7 points (previously +12.0 points) in October to +10.6 points in November. The long-term average is +6.0 points.
Business confidence fell from +4.5 points (previously +4.0 points) in October to +3.2 points in November. The long-term average is +5.8 points.
The survey was undertaken from November 25 to 30.
The rolling annual average business conditions index fell from +16.4 points in October to +16.1 points in November, modestly below the record high of +17.3 points in June.
Components: the index of trading conditions fell from +16.8 points to +15.2 points; employment rose from +7.0 points to +8.6 points; profitability fell from +13.2 points to +8.2 points; forward orders fell from +2.7 points to -0.4 points; stocks rose from +1.0 point to +3.5 points; exports fell from +3.1 points to +0.7 points; exporters’ sales fell from +15.7 points to +2.4 points.
Inflationary indicators: The monthly reading of labour costs rose at a 1.2 per cent quarterly rate in November after a 0.9 per cent rise in October. Purchase costs rose at a 1.0 per cent quarterly rate in November after a 1.1 per cent rise in October. Final product prices rose at a 0.4 per cent quarterly rate, down from +0.5 per cent. Retail prices rose at a 0.3 per cent quarterly pace after rising by 0.2 per cent in October.
Capacity utilisation rose from 81.8 per cent to 82.1 per cent in November, and remains above the long-term average of 81.1 per cent.
The proportion of firms reporting that they did not require credit eased from 72 per cent to 50 per cent.
NAB reported: “The decline in the month was driven by falling profitability and lower turnover. On the positive side, employment rebounded a little and continues to suggest relatively robust growth in the workforce.”
And: “While falling house prices have garnered much media attention of late, businesses do not yet suggest they are having a material impact. Falling house prices in themselves may have a ‘wealth effect’ on households but given the prior large run up the impact of the declines to date is unclear. Also lower turnover of house sales and less housing construction activity is likely to have additional negative impacts on both the consumer and house building.” 
Residential property prices
The Bureau of Statistics (ABS) has released its Residential Property Price indexes for the September quarter. The ABS noted:
“The price index for residential properties for the weighted average of the eight capital cities fell 1.5 per cent in the September quarter 2018. The index fell 1.9 per cent through the year to the September quarter 2018.”
“The capital city residential property price indexes fell in Melbourne (-2.6 per cent), Sydney (-1.9 per cent), Perth (-0.6 per cent) and Darwin (-0.9 per cent), and rose in Brisbane (+0.6 per cent), Adelaide (+0.6 per cent), Hobart (+1.3 per cent) and Canberra (+0.5 per cent).”
“Annually, residential property prices fell in Sydney (-4.4 per cent), Darwin (-4.4 per cent), Melbourne (-1.5 per cent), Perth (-0.5 per cent) and rose in Hobart (+13.0 per cent), Canberra (+3.7 per cent), Adelaide (+2.0 per cent) and Brisbane (+1.7 per cent).”
“The total value of residential dwellings in Australia was $6,847,057.2m at the end of the September quarter 2018, falling $70,148.6m over the quarter.” (The decline was 1 per cent).
“The mean price of residential dwellings fell $9,700 to $675,000 and the number of residential dwellings rose by 40,900 to 10,143,700 in the September quarter 2018.”
CommSec estimates that the number of people per home was steady at 2.473 in the September quarter.
The value of all dwellings in Australia in the September quarter was 0.2 per cent higher than a year ago. Over the year the value of homes was higher in all states and territories except Northern Territory (down 5.7 per cent) and NSW (down 2.2 per cent).
The number of all homes in Australia rose by 40,900 in the September quarter and rose by 181,300 over the year. The annual lift in the number of homes was the smallest in 2½ years.
Consumer Sentiment
The ANZ-Roy Morgan consumer confidence rating fell by 1.5 per cent to 117.7 in the past week. The index is above both the average of 114.3 held since 2014 and the longer-term average of 113.0 held since 1990.
Three out of five major components of the index decreased last week:
• The estimate of family finances compared with a year ago was down from +13.8 to +13.0;
• The estimate of family finances over the next year was up from +24.2 to +26.3;
• Economic conditions over the next 12 months was down from +12.5 to +5.7;
• Economic conditions over the next 5 years was up from +15.3 to +15.6;
• The measure of whether it was a good time to buy a major household item was down from +31.6 to +27.9.
The measure of inflation expectations rose from 4.1 per cent to 4.5 per cent.
What is the importance of the economic data?
The monthly National Australia Bank business survey is valuable in providing a timely reading about the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
The Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.
The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
What are the implications for interest rates and investors?
The housing market continues to rebalance. A soft landing is anticipated, but the impact of falling home prices and rising mortgage rates on household budgets will need to be closely monitored. Housing credit growth for owner-occupiers remains firm and first home buyers are taking advantage of improving home affordability.
Aussie consumers are a resilient bunch. Negative news flow about politics and global trade can influence confidence surveys in the short-term. But it’s no coincidence that sentiment has been hovering around four-year highs this year, given the strength of the job market.
The latest employment report provides further evidence that spare capacity is slowly being reduced in the labour market. But the transmission to higher wages and inflationary pressures will only be gradual, despite emerging skills shortages.
The Reserve Bank is under no pressure to lift interest rates – its preferred next move. Fiscal policy is doing some of the heavy lifting in the form of government spending on infrastructure. Non-mining business conditions are also near record highs – the drag from mining investment has almost troughed. The Aussie dollar has weakened, trade surpluses are being posted and economic growth is above its long-term potential, boosted by household consumption.
The Reserve Bank Board won’t wait to see the ‘whites of the eyes’ of higher inflation rates before lifting the cash rate. But those pressures are still some way off. Therefore, CommSec expects interest rates to be unchanged until at least November 2019.
Published by Ryan Felsman, Senior Economist, CommSec