Aussie job hiring conditions hit 3½-year low
Consumer confidence falls year after elections
NAB Business survey; Consumer sentiment

Business survey: The NAB business conditions index fell from +7.2 points in March to +3.1 points in April, below the long-term average of +5.8 points. But the business confidence index rose from 5½-year lows of -0.6 points in March to -0.3 points in April – below the long-term average of +5.8 points.

Employment: The employment sub-index fell to a 3½-year low of -1.2 points in April, down from +6.2 points in March and below the long-term average of +2 points.

Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.1 per cent to 114.8 points. Consumer sentiment is still above both the short-term average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990. The business survey has broad implications for investors and the economy. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.

What does it all mean?

The Reserve Bank is focussed on the health of the job market. Recent leading indicators of job hiring intentions have been mixed. According to the Bureau of Statistics, job vacancies were at record highs in February. But more recent readings from ANZ (jobs ads) and the Department of Jobs and Small Business (skilled internet job vacancies) point to a loss of job hiring momentum.

In a worrying development for policymakers, NAB’s April employment index has turned negative, falling to the lowest level since August 2015, implying monthly job gains of just 14,000 and a potential lift in the jobless rate.

Job creation has been solid so far this year with an average of 23,700 positions created on a monthly basis through to March. And 25,400 jobs per month were added over the year to March, keeping the trend unemployment rate at decade lows of 5 per cent. The Reserve Bank is steadfastly expecting the unemployment rate to remain at stuck at 5 per cent through to end-2020.

Some are attributing the easing in Aussie consumer confidence to disappointment that the Reserve Bank didn’t cut interest rates last week. But according to recent
Westpac-Melbourne Institute monthly consumer confidence surveys, the “mortgager” sentiment sub-index has actually fallen from 108.2 points in February to 100.3 points in April (the most recent survey), despite growing market expectations for an official interest rate cut.

Instead, we think the weaker Aussie dollar and sharemarkets are behind the easing in consumer optimism. The value of the Aussie dollar weakened to three-year lows against the greenback overnight, trading near US69.40 cents. And the Aussie sharemarket continues to retrace from 11-year highs due to escalating trade tensions between the US and China. In fact, the S&P/ASX200 index fell by 0.4 per cent last week and is currently down around 1.7 per cent so far in May.

Like business confidence, consumer sentiment is typically choppy in the lead up to Federal elections. In the period leading up to and immediately after elections, confidence surveys are mixed as consumers digest policies and outcomes. Interestingly, our analysis of the long run ANZ-Roy Morgan consumer confidence index shows that sentiment is generally weaker 12 months after the election outcome in known as the ‘new’ government’s ‘honeymoon’ period subsides.

What do the figures show?
National Australia Bank Business Survey

The NAB business conditions index fell from +7.2 points in March to +3.1 points in April, below the long-term average of +5.8 points. But the business confidence index rose from 5½-year lows of -0.6 points in March to -0.3 points in April – below the long-term average of +5.8 points.

The survey was undertaken from April 18-30.

The rolling annual average business conditions index fell from +12.0 points to +10.4 points in April, below the record high of +17.3 points in June 2018, but above the long-run average of +6.0 points.

And the rolling annual average business confidence index fell from +5.0 points to +4.1 points in April, below the long-run average of +5.9 points.

Key Components: The index of trading conditions fell from +10.9 points to +7.4 points; employment fell from +6.2 points to -1.2 points; profitability fell from +4.8 points to +1.0 point; forward orders fell from -1.1 points to -1.4 points.

Inflationary indicators: The monthly reading of labour costs rose at a 0.5 per cent quarterly rate in April after a 0.6 per cent rise in March. Purchase costs rose at a 0.5 per cent quarterly rate (also +0.5 per cent rise in March). Final product prices rose at a 0.2 per cent quarterly rate (previously +0.3 per cent). Retail prices rose at a 0.4 per cent quarterly rate (previous +0.3 per cent).

Capacity utilisation rose from 81.0 per cent in March to 81.1 in April, in-line with the long-term average.

The proportion of firms reporting that they did not require credit rose was broadly unchanged at 70 per cent.

NAB reported: “Overall, our read of the signal from the business survey is that the surprise jump in conditions last month was unwound this month – with business conditions, confidence and forward orders now all below average (a la February). A key development in the Survey this month was the sharp decline in the employment index to a below average read – the first since late 2016. Future readings of
this index should be closely watched as, for the most part, leading indicators of the labour market have remained positive to date but could be expected to decline based on the prior slowing in economic activity.”

“Looking forward, business confidence and forward orders suggest ongoing weakness in private sector momentum with growth likely to remain weak in coming quarters. Capacity utilisation remains around average but no longer suggests a strong outlook for employment and capex. Overall, price pressures remain weak across the costs variables (including wage bill growth), suggesting that in addition to a slowing in
the pace of activity in the business sector, there still remains spare capacity in the labour market.”

Consumer Sentiment

The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.1 per cent to 114.8 points. But consumer sentiment is still above both the short-term average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.

Three out of the five major components of the index fell last week:

The estimate of family finances compared with a year ago was up from +6.5 points to +8.6 points;

The estimate of family finances over the next year was up from +25.9 points to +27.6 points;

Economic conditions over the next 12 months was down from +12.5 points to +3.4 points;

Economic conditions over the next 5 years was down from +14.5 points to +10.7 points;

The measure of whether it was a good time to buy a major household item was down from +27.1 points to +23.9 points.

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 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?

Aussie businesses and consumers are rightly cautious. A Federal election is imminent and a change of government looks likely, creating policy uncertainty. Rising US-China trade tensions could weigh on global growth.

At the same time, the Aussie economy has lost momentum over the past year, hampered by slowing global economic activity, weaker household spending, the property downturn and tighter credit conditions for borrowers. The AiGroup’s leading indicators of construction and services sector activity are both contracting. And
international tourist and student arrivals are slowing. That said, the Chinese economy has stabilised in recent months.

Encouragingly, conditions in the mining and agricultural sectors have improved. And Australia has a huge pipeline of infrastructure projects that are currently being built across the country. But more needs to be done.

A more aggressive fiscal stimulus may be needed by the incoming government to support household consumption and economic growth. The Reserve Bank and Aussie dollar can’t do all the heavy lifting.

Of course, the potential for weaker jobs data in the months ahead will likely be the trigger for a rate cut. The last time the NAB employment sub-index was around current levels, the official cash rate was cut several months later.

We expect the Reserve Bank to wait until it sees the national unemployment rate edge closer to 5.5 per cent before it pulls the interest rate trigger. The Kiwi central bank cut rates immediately after one poor jobs report.

Tomorrow’s wages growth and Thursday’s jobs data take on extra importance for the interest rate outlook. But will the Reserve Bank look through the Easter seasonality if it’s a weaker-than-expected result?

CommSec expects no change in the cash rate for a few months, but rate cuts remain more likely than rate hikes.

Published by CommSec ,Ryan Felsman, Senior Economist