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Fastest private sector wage growth in 4 years
Wage Price Index; Consumer confidence

Wages: The wage price index rose by 0.5 per cent in the March quarter following a similar increase in the December quarter. Annual wages growth was unchanged at 2.3 per cent. Private and public sector wages were up 2.4 per cent on the year.

Bonuses paid: Including bonuses (hourly rates of pay), wages rose by 0.5 per cent in the March quarter to be up by 2.6 per cent on a year ago. Private sector wages were up 2.7 per cent for the year.

Victoria leads: Victorian wages by 2.7 per cent over the year – equalling the strongest annual growth in four years. Next strongest was Tasmania, up 2.5 per cent on the year.

Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index rose by 0.6 per cent to 101.3 in May. The sentiment index is near its long-term average of 101.5.

The data on wages highlights the costs faced by businesses and gives insights into future interest rate decisions. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.

What does it all mean?

• It is a slow process, but wage growth continues to edge higher. At 2.4 per cent, private sector wages are growing at the fastest pace for over four years. And in just under two years, wage growth has lifted from 1.8 per cent.

• As always, it’s important to relate wages to prices. Wage growth may be slower than in the past, but so is price inflation. Wages are still well ahead of prices. Private sector wages are up 2.4 per cent over the year, 1.1 percentage points above the 1.3 per cent lift in consumer prices. The result is even stronger when you take into account bonuses with private wage growth at 2.7 per cent. Encouragingly, there is positive real wage growth across the country. And positive real wage growth is good for spending.

• Consumers are feeling OK. And when you consider that the US-China trade skirmish is still occurring, petrol prices are lifting, the Federal Election campaign is on and the Aussie dollar is below US70 cents, that is not a bad outcome. The other piece of good news is that unemployment expectations have eased again to near 7½-year lows, signalling tighter job markets.

What do the figures show?

Wage Price Index

• The wage price index rose by 0.5 per cent in the March quarter following a 0.5 per cent increase in the December quarter. Annual wage growth was steady at 2.3 per cent.

• Private sector wages rose by 0.5 per cent in the March quarter with public sector wages up 0.4 per cent. Private sector wages rose by 2.4 per cent in the year to March – the fastest growth in 4 years. Public sector wages rose by 2.4 per cent over the year to March.

• Including bonuses (hourly rates of pay), wages rose by 0.5 per cent in the March quarter to be up by 2.6 per cent on a year ago. Private sector wages rose 0.5 per cent in the quarter and 2.7 per cent on the year.

• Industries with fastest annual wage growth: Health care & social assistance (up by 3.0 per cent); Electricity, gas, water and waste services (up 2.8 per cent); Arts & recreational services (up by 2.6 per cent);

• Industries with slowest annual wage growth: Information media & telecommunications (up by 1.8 per cent); Construction (up by 1.8 per cent) and Retail trade (up by 1.9 per cent).

• Annual wage growth across States & Territories: NSW (up by 2.3 per cent); Victoria (up by 2.7 per cent); Queensland (up by 2.3 per cent); South Australia (up by 2.1 per cent); Western Australia (up by 1.6 per cent); Tasmania (up by 2.5 per cent); Northern Territory (up by 2.4 per cent) and ACT (up by 2.1 per cent).

• In terms of real wage growth, all states and territories have annual wage growth exceeding inflation. Doing best is Northern Territory: wages are up 2.4 per cent versus 0.4 per cent inflation. But real wage growth is only 0.3 percentage points in the ACT.

Consumer confidence

• The Westpac/Melbourne Institute survey of consumer sentiment index rose by 0.6 per cent to 101.3 in May. The sentiment index is near its long-term average of 101.5. The survey of 1,200 people was conducted from May 6-10.

• The current conditions index rose by 2.8 per cent, but the expectations index fell by 0.7 per cent.

• Consumer sentiment rose for all income groups except those earning $80,000-100,000 (down 14.1 per cent). The only age group to report weaker sentiment was those aged 25-44 years (down 3.2 per cent).

• Three of the five components of the index rose in May:

Ø The estimate of family finances compared with a year ago rose by 6.3 per cent to 85.3;

Ø The estimate of family finances over the next year fell by 1.6 per cent to 103.8;

Ø Economic conditions over the next 12 months rose by 2.3 per cent to 104.2;

Ø Economic conditions over the next 5 years fell by 2.9 per cent to 97.3;

Ø The measure on whether it was a good time to buy a major household item rose by 0.3 per cent to 115.8.

• Housing outlook: A good time to buy a dwelling? The index fell by 3.8 per cent to 114.9, and was up 13.6 per cent on the year. House price expectations fell by 6.5 per cent to 89.4, but were down by 31 per cent on a year ago.

• Unemployment expectations: Unemployment expectations fell by 5.1 per cent to 120.9 in May (tighter job market) to be near 7½-year lows.

What is the importance of the economic data?

• The Wage Price Index has been compiled since September quarter 1997 and measures quarterly changes in wage and salary costs for employees. The index is based on a representative sample of employees, and includes measures of non-wage costs including superannuation, payroll tax, public holiday and workers compensation. The Wage Price Index is useful in measuring wage pressures in the economy. While strong growth in wages would boost domestic spending, it could also serve to lift employer costs and prices and add to economy-wide inflationary pressures. The wage price index is a measure of hourly pay rates (excluding bonuses).

• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
What are the implications for interest rates and investors?

• The latest data neither opens the door to a rate cut, neither does it close the door. The next major focus is the monthly job data tomorrow.

• But it is by no means ‘clear air’ to assess job data, especially with businesses not keen to take on new workers or change strategy in an election environment.

• In the Healthcare sector both wages and prices are growing near 3 per cent. Healthcare operators are finding it hard to attract and retain staff. And businesses are forced to paying higher wages. Investors need to focus on costs, margins and profitability in the sector.

• Consumer confidence is OK. People are not overjoyed but they aren’t despondent either. The hard part for retailers is getting consumers to part with their hard-earned dollars. Retailers need to work hard on their marketing to ensure that their offering stands out.

• CommSec doesn’t expect a change in interest rates for a few months. But rate cuts are more likely than rate hikes.

Published by Craig James, Chief Economist, CommSec