Consumer sentiment lifts for 5 consecutive weeks

Services & construction activity hit record lows
Consumer confidence; CBA Services gauge; Construction sector

Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 5.3 per cent to 89.5 points. Sentiment has lifted for five successive weeks and is up 37.1 per cent since hitting record lows (lowest since 1973) of 65.3 points on March 29.

Services sector: The ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) fell from 38.5 points in March to a record low of 19.5 points in April (lowest since May 2016). Any reading below 50 indicates a contraction in activity.

Construction sector: The Australian Industry Group (AiGroup) Performance of Construction Index (PCI) fell by 16.3 points to a record low (since September 2005) of 21.6 points in April. Readings below 50 indicate a contraction of activity.

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The services purchasing managers index provides guidance on conditions in retailing, financial services and the services sector more broadly. The Performance of Construction index provides insights for business conditions in the sector.

What does it all mean?

• It’s an incredibly tough time for Aussie business owners and workers, but consumers continue to be heartened by our success in the fight against COVID-19 – which has shown up in a lift in the Aussie dollar against the greenback. More states are easing restrictions, encouraging us to venture out. Slowly life is returning to ‘normal’, despite the need to continue social distancing measures to keep the virus at bay. If all goes to plan, parts of the economy will be gradually reopened, some workers can return to work, schools can resume classes and holidays can be booked for later in the year – perhaps to New Zealand!

• Despite the improvement in consumer views on their finances and the economic outlook, caution remains with overall confidence still remaining near Global Financial Crisis levels. In fact, households have become even less willing to consider purchasing a ‘big ticket’ item – not good news for auto alley, whitegoods retailers or real estate agents.

• Faced with rising job insecurity and an uncertain future, most Aussies are scaling back their discretionary spending – as evidenced by the Commonwealth Bank’s credit and debit card spending data over the past few months. In fact, total spending over the fortnight to May 1 is still down by 10 per cent on year ago levels.

• But it’s not all bad news with CBA Group economists reporting, “The most recent data suggests that the pulse of spending has picked up across a range of goods and services and across all states and territories.” And as retailers – such as Kathmandu – gear up for possible re-openings of stores, it appears that their post-virus world may look very different. According to the CBA data, “spending on retail items online is up by 110 per cent over the past fortnight compared to the same period a year earlier.”

• Aussie builders and construction workers are doing it tough. The AiGroup’s construction activity gauge hit record lows in April. While the construction sector continues to operate with social distancing measures in place, demand has fallen sharply due to the economic downturn. AiGroup reports that COVID-19 shutdowns have been reported – impacting some existing projects – but likely delays to approved projects and construction-related investment will adversely impact the industry in the near term.

What do the figures show?

Consumer sentiment – Week ended May 3

• The weekly ANZ-Roy Morgan consumer confidence rating rose by 5.3 per cent to 89.5 points. Sentiment has lifted for five successive weeks since hitting record lows (lowest since 1973) of 65.3 points on March 29.

• Four of the five major components of the index rose last week:

• The estimate of family finances compared with a year ago was up from -20.9 points to -16.7 points;

• The estimate of family finances over the next year was up from +8.4 points to +14.8 points;

• Economic conditions over the next 12 months was up from -41.9 points to -40.6 points;

• Economic conditions over the next 5 years was up from -7.5 points to +5.2 points;

• The measure of whether it was a good time to buy a major household item was down from -13.1 points to -15.3 points.

• The measure of inflation expectations fell from 3.6 per cent to 3.2 per cent.

Services Purchasing Managers’ index – April

• The ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) fell from 38.5 points in March to a record low (since May 2016) of 19.5 points in April. Any reading below 50 indicates a contraction in activity.

• According to the CBA and IHS Markit, “Latest PMI data showed the extent to which stricter measures to contain the coronavirus disease 2019 (COVID-19) outbreak impacted the Australian service sector during April, with business activity contracting at a record rate. This was accompanied by a severe fall in sales amid reports of temporary business closures. Job shedding intensified as a result and business sentiment remained subdued. Prices also fell during the month.”

Performance of Construction – April

• The AiGroup Performance of Construction Index (PCI) fell by 16.3 points to a record low of 21.6 points in April (lowest since September 2005). Construction activity fell by 21.1 points to 18 points; new orders were down 19.7 points to 15.7 points; selling prices fell 13.2 points to 26.2 points; average wages fell 10.5 points to 43.7 points and employment was down 10.8 points to 25.6 points. Readings below 50 indicate a contraction of activity.

• By sector, all four construction sectors fell to record lows in April in seasonally adjusted terms. In trend terms, apartment building was lowest in April (22.1 points), followed by house building (37.1 points), engineering construction (36.6 points) and commercial construction (24.5 points).

• According to the AiGroup, “The Australian PCI® shows the national activity restrictions due to COVID-19 have taken a heavy toll on construction industry activity already, even though the industry has not been subject to mandatory shut-down requirements like many other industries. Construction businesses report steep declines in activity and new orders across the board. Existing major projects are being cancelled or deferred, with timetables for recommencement uncertain.”

• And, “The impact of COVID-19 activity restrictions are only just beginning for the construction industry. Construction-related investment and spending decisions will be affected for some time to come. For construction, it is possible that worse declines in activity and demand are yet to be felt.”

What is the importance of the economic data?

• 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.

• The CBA Purchasing Manager indexes (PMIs) for services and manufacturing are released each month. The Australian PMIs are the local equivalents of similar indexes released for other countries. The PMIs are amongst timeliest economic indicators released in Australia. The PMIs are useful not just in showing how the sectors are performing but in providing some sense about where they are heading. The key ‘forward looking’ components are orders and employment.

• 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 investors?

• Retail trade data from the Bureau of Statistics is released for the March quarter tomorrow. The preliminary reading for March was very encouraging – up by a whopping 8.2 per cent – the most on record as Aussies hoarded staples, such as rice, pasta and toilet paper during the height of the pandemic. Economists are predicting a 1.8 per cent lift in spending volumes during the March quarter. But after supermarket sales surged by over 30 per cent in March from a year ago, CBA credit and debit card spending data implies that grocery sales growth will slow in April.

• Home prices are expected to ease in the near term. However, supportive government measures – the potential removal of stamp duty in New South Wales and an easing of restrictions on in-home auctions – together with an eventual reopening of the economy could yet support the property market later in the year.

• Building approvals remained resilient in March. Many new home buyers appeared to secure financing in March and April and may proceed with construction of their new abodes depending on their individual financial circumstances. Should this materialise, building material company earnings could be supported for the remainder of the year, encouraging residential developers and homebuilders to continue with approved projects, while retaining construction workers as COVID-19 restrictions are eased.

Published by Ryan Felsman, Senior Economist,  CommSec