Spending flat ahead of tax cuts
Commonwealth Bank Business Sales Index

Economy-wide spending remained soft into July. The Commonwealth Bank Business Sales Indicator (BSI) fell by 0.1 per cent in July after a similar decline in June. Spending has softened over the past five months and is below the 0.4 per cent long-term average monthly growth pace.

The annual trend sales growth fell from 3.8 per cent to 3.2 per cent – the slowest rate in 22 months and below the 5.5 per cent long-term average growth pace.

The more volatile seasonally-adjusted measure of the BSI rose by 0.6 per cent in July – the sixth gain in seven months. Growth has averaged 0.3 per cent per month over the period.

At a sectoral level, 14 of 19 industry sectors rose in trend terms in July. Previously in May, 12 of the 19 sectors posted gains in sales.

Spending rose in six states and territories in July. The strongest gains were recorded in Northern Territory (up by 0.9 per cent), but spending fell most in NSW (down 0.6 per cent).

The Commonwealth Bank BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities. The BSI covers spending broadly across the economy rather than just retail sales, including spending on automobiles, personal services and airlines.

What does it all mean?

• Perhaps Aussie taxpayers are waiting for their tax returns to be processed. That would certainly explain the relative flatness of economy-wide spending in the past few months.

• But all the reports do indicate that the money is flowing from the Tax Office to hard working Aussie workers. Now people just have to work out what they want to do with the tax offsets.

• Certainly consumer confidence is positive, interest rates are super low and the lift in the minimum wage is also delivering extra spending power. So we are in ‘wait and see’ mode.

What does the data show?

• The Commonwealth Bank Business Sales Indicator (BSI) – a measure of economy-wide spending fell by 0.1 per cent in July after a similar fall in June. The monthly movements in spending in the past few months are around the weakest in around 2½ years.

• Over the period February 2018 to March 2019, monthly spending gains were near trend, growing by between 0.3-0.6 per cent a month. But spending slipped to 0.2 per cent growth in April 2019 and spending was flat in May before the small falls in June and July.

• The annual trend sales growth fell from 3.8 per cent to 3.2 per cent – the slowest rate in 22 months and below the 5.5 per cent long-term average growth pace.

• The more volatile seasonally-adjusted measure of the BSI rose by 0.6 per cent in July – the sixth gain in seven months. Growth has averaged 0.3 per cent per month over the period.

• The Commonwealth Bank BSI is obtained by tracking the value of credit and debit card transactions processed through the Commonwealth Bank merchant facilities. And in line with the practice of the Bureau of Statistics with retail trade data, seasonally adjusted and trend estimates of the BSI are obtained by applying statistical software. The seasonally adjusted and trend BSI results permit analysis of the broader underlying trends that may be hidden in the raw data.

• Across sectors, 14 of the 19 industry sectors rose in trend terms in July. Amongst the biggest gains in sales were Transportation (up 1.1 per cent); Mail Order/Telephone Order Providers (up 1.0 per cent); and Airlines (up 0.7 per cent).

• Sales fell most in Amusement & Entertainment (down 1.4 per cent); Retail Stores (down 1.1 per cent); and Automobiles & Vehicles (down by 0.9 per cent).

• Sales at Business Services were broadly flat in July.

• In annual terms in July, all but eight of the 19 industry sectors recorded gains. Spending fell by 8.9 per cent over the past year in Automobiles & Vehicles, followed by Mail Order/Telephone Order Providers (down 3.8 per cent); and Clothing Stores (down by 3.5 per cent).

• At the other end of the scale, sectors with strongest annual growth in July included Transportation, Retail Stores, Airlines, Utilities and Hotels & Motels.

• Spending rose in six states and territories in July. The strongest gain was recorded in Northern Territory (up 0.9 per cent); followed by Queensland and Western Australia (both up 0.4 per cent); Tasmania (up 0.2 per cent); South Australia and ACT (both up 0.1 per cent).

• Sales fell 0.3 per cent in Victoria and fell 0.6 per cent in NSW.

• In annual terms all states and territories had sales above a year ago except the Northern Territory (down 2.6 per cent). The strongest growth was in Tasmania (up 5.6 per cent); Western Australia (up 5.4 per cent); Queensland (up 4.6 per cent); and ACT (up 4.3 per cent). But annual sales growth was soft in South Australia (up 1.5 per cent), Victoria (up 2.8 per cent) and NSW (up 0.2 per cent).

What is the importance of the report?

• The Commonwealth Bank releases its Business Sales Index (BSI) around the 20th each month. The data provides a broader perspective of consumer spending. The BSI includes transactions made at traditional retail establishments such as supermarkets, clothing stores and cafes & restaurants. But it is more comparable to the ABS Household Final Consumption Expenditure released on a quarterly basis. The Business Sales Indicator also covers businesses such as airlines, car dealers and utilities such as water and electricity companies as well as motels, business, professional and government services and wholesalers.

What are the implications for interest rates and investors?

• Investors need to watch comments made by consumer-focussed companies during the current profit-reporting season for early evidence of the flow-through of tax cuts.

• The Reserve Bank is expected to ‘sit pat’ for now, assessing incoming economic data over the coming months before deciding the next move for the record-low cash rate. We expect quarter of a per cent rate cuts in November 2019 and February 2020.

Published by Craig James, Chief Economist, CommSec