Annual retail spending hits 15-month highRecord engineering construction activityRetail trade; Performance of Construction Index
Retail trade lifts: Retail trade rose by 0.3 in August after a flat outcome in July. Sales have lifted in seven out of eight months in 2018. Annual spending growth rose from 2.9 per cent in July to 3.8 per cent in August – the strongest growth rate in 15 months.
Construction activity contracts: The Performance of Construction Index (PCI) eased to 49.3 in September, down from 51.8 in August – the first contraction in activity in 20 months. A reading above 50 points indicates construction activity is generally expanding; below 50, that it is declining.
Record engineering activity: The engineering PCI sub-index rose by 10.7 to 65.7 in September – the highest level since records began in September 2005. Engineering activity has expanded for 18 consecutive months.
Housing construction activity falls: The houses PCI sub-index fell 7.8 points to 42.0 in September – the lowest level in two years. Activity in the housing sector has contracted for two successive months. Retail trade data is important for consumer-focussed companies. The Performance of Construction index provides insights for business conditions in the sector.
What does it all mean?
Aussie consumers are still spending. In fact, retail spending has lifted – albeit modestly – in seven out of eight months this year. And the annual growth rate in spending is the strongest in 15 months.
Discretionary spending continues to be focused on “experiences”. Rising cost of living pressures, including elevated petrol prices, lifting mortgage rates, higher health care insurance and never-ending utilities bills aren’t discouraging us from going out on the town. Spending at cafes and restaurants has lifted by 5.2 per cent over the year to August. And cheaper clothing (and winter/wet weather) is encouraging us to buy new threads.
Spending growth is broad-based with only recreational goods retailing particularly weak, but demand for furniture and housing-related goods may come under pressure from the weaker housing market in the big cities. That said, annual retail spending growth in Victoria (up by 5.6 per cent) is the highest in more than two years and Tasmanians are embracing retail therapy by the most in four years (up by 4.9 per cent).
A raft of housing data releases this week have confirmed that the residential construction boom is over. Dwelling investment and activity is moderating and will likely be a drag on broader economic growth for the foreseeable future.
Tighter lending conditions, increasing mortgage rates and falling home prices are impacting housing demand, inventory levels and home building.
While there is still a humongous pipeline of houses and apartment construction work yet to be completed, leading indicators, such as building approvals and AiGroup’s Performance of Construction Index, have signalled weaker activity ahead.
According to the Bureau of Statistics, the construction sector has created 30,000 jobs over the year to August, employing 1.19 million workers, so the impact on demand for labour bears watching.
A potential offset, however, is government spending on infrastructure. Call it a fiscal stimulus if you like. Engineering construction activity remains buoyant, supported by large-scale public transport and road-related infrastructure projects. Activity, according to AiGroup, expanded for an 18th consecutive month in September to the highest level in 13 years.
What do the figures show?Retail trade
Retail trade rose by 0.3 in August after a flat outcome in July. Sales have lifted in seven out of eight months in 2018. Annual spending growth rose from 2.9 per cent in July to 3.8 per cent in August – the strongest growth rate in 15 months.
Non-food retailing rose by 0.5 per cent in August and annual growth lifted from 2.1 per cent to 3.4 per cent – the strongest growth rate in 14 months.
Spending rose most in August for “Newspaper and book retailing” (up by 3.4 per cent); “Other retailing nec” (online retail, antiques, flowers etc)” (up by 2.0 per cent); “Footwear and other personal accessory retailing” (up by 1.8 per cent), “Furniture, floor coverings, houseware and textile goods retailing” (up by 1.1 per cent), “Department stores” (up by 0.9 per cent); and “Cafes, restaurants & takeaway food services” (up by 0.7 per cent).
Spending fell the most for “Other recreational goods retailing (sport and camping equipment, toy and game retailing, entertainment and media retailing)” (down 6.7 per cent) and “Electrical goods retailing” (down by 0.5 per cent).
Spending rose in six Australian states and territories in August: NSW (up by 0.5 per cent); Victoria (up by 0.2 per cent); Queensland (up 0.1 per cent); South Australia (up by 0.8 per cent); Western Australia (down by 0.03 per cent); Tasmania (up by 0.6 per cent); NT (down by 1.3 per cent); ACT (up by 0.2 per cent).
Sales by chain-store retailers and other large retailers rose by 0.5 per cent in August to stand 5.0 per cent higher over the year.
Performance of Construction
The Performance of Construction index (PCI) eased to 49.3 in September, down from 51.8 in August – the first contraction in activity in 20 months. A reading above 50 points indicates construction activity is generally expanding; below 50, that it is declining.
Three of the five major sub-indexes contracted (below 50) in September:
• Activity rose 2.5 points to 52.0;
• Houses fell 7.8 points to 42.0 – the lowest level in over two years;
• Apartments rose 11.4 points to 44.2 – near sixyear lows;
• Commercial rose 0.6 points to 49.8 – the third successive month of contraction;
• Engineering rose 10.7 points to a record-high 65.7 – the 18th consecutive month of expansion.
What is the importance of the economic data?
The Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’. Retail trade covers spending at a broad range of retail outlets but excludes both petrol and motor vehicle sales. A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks. But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.
The Australian Industry Group compile the Performance of Manufacturing Index, the Performance of Services index and the Performance of Construction index each month (the latter with the Housing Industry of Australia). The Commonwealth Bank and Markit also compile purchasing manager surveys for manufacturing and services sectors. The surveys are amongst the timeliest economic indicators released in Australia. The surveys are useful not just in showing how key sectors are performing but also in providing some sense about where they are headed. The key ‘forward looking’ components are orders and employment.
What are the implications for interest rates and investors?
So far the negative wealth effect from falling home prices is being expressed through falling new car sales. Consumers, while faced with multiple headwinds, are still spending. Consumer confidence ebbs and flows. According to the latest weekly gauge from ANZ-Roy Morgan, the estimate of family finances compared with a year ago – a key leading indicator of future spending – is at eight-month highs. As always, the job market – which remains solid – is the critical driver of consumer behaviour.
The launch of Apple’s iPhone XS in September could have an outsized impact on retail sales next month. Also, online sales events, Cyber Monday and Black Friday (in November) will drive sales in the lead-up to Christmas trading.
The residential housing construction boom is unwinding. Home prices are declining in Sydney and Melbourne, investor demand is falling and access to housing finance is more challenging, given tighter lending restrictions by lenders. Fewer new homes are being approved for construction, reducing overall activity in the construction sector after an extended period (19 months) of expansion.
It is hoped that construction workers are soaked-up by booming public sector-related infrastructure projects. Construction workers account for 9.4 per cent – the third largest – of Australia’s total workforce. Alternatively, the pickup in skilled job vacancies in the mining sector could potentially see construction workers relocate back to the Pilbara in Western Australia to work on large-scale iron ore projects after a stint on the East Coast.
CommSec expects interest rates to be unchanged until late 2019.
published by Ryan Felsman, Senior Economist, CommSec