For a more comprehensive round up of the week, listen to Stephen’s full report here.
A rather nasty December labour force report seemed to contradict our view expressed last week that the Australian economy is starting to improve more than widely expected. In essence, total employment in January fell by 22,600, a much weaker outcome than the consensus market forecast of a 10,000 gain. The breakdown of the January employment loss was soft too with a reduction of 31,600 positions set against a 9,000 gain in part-time jobs. The one bright part of the the report, the unemployment rate flat-lined at 5.8%, was really in part an accident of mathematical rounding (the unemployment rate edged up when taken to the second decimal point) and more worryingly was also down to a declining labour force (the participation rate fell to 64.6% in January from 64.8% in December) indicative that some job seekers have given up looking for work.
Notwithstanding the disappointing December labour force report, we stick with our view that the Australian economy is improving. The improving part of the economic cycle starts with demand accelerating, whether it be home buying activity, more general household consumption spending, or exports stemming from better global economic, or a combination of all three. Businesses almost invariably wait for better demand to show before adding to the improving part of the cycle by investing more in buildings and machinery and eventually lifting the number of people they employ. It is quite common for businesses to still be cutting their workforces well beyond the bottom of the economic cycle and in to the early stages of accelerating economic growth.
We suspect that the weak December labour force report was a late and lagged response to soft Australian economic conditions through much of 2013. However, the evidence that demand was lifting in late 2013 and early 2014 is compelling. Last week we referred to better net exports, home building approvals and retail sales. Just before the release of the December labour force data, November housing finance figures were released and showed another strong monthly gain of 1.7% by value and up by 24.9% compared with November 2012. More general lending finance commitments for November (also released last week) showed that lending strength is not just confined to housing finance. The value of commercial finance commitments increased by 8.3% in November and by 30.2% compared with November 2012.
Strongly rising housing and commercial finance commitments run ahead of actual spending. They are leading indicators of where spending is likely to be in the months ahead. In short, there is strong evidence that spending took a stronger turn in the final quarter of 2013 and there is also strong evidence, by virtue of the lift in lending finance commitments over recent months, that spending will continue to strengthen through the first quarter of 2014 at the very least. Stronger spending is likely to start influencing business spending decisions in the early months of 2014, although with the lags involved it may be nearer to mid-year before actual non-mining investment starts to lift and before the ranks of those in employment start to swell.
Most likely, monthly employment readings will still be quite soft through the first quarter of 2014. The second quarter should be a different story if, as we believe, the economy has started to improve, with monthly employment increases averaging around 25,000 a month, sufficient to genuinely cap the unemployment rate.
Even though the economic numbers are looking promising on balance, keeping the growth cycle on track is as much about sustaining confidence as anything else. Household and business confidence, even though running better than through much of 2013, is still relatively fragile. The role of the Government and the RBA should be to add to confidence that the economic outlook is improving (not entirely clear from recent pronouncements by both). If the Government intends to contain the budget deficit without damaging more general economic sentiment it is important that it is done in a way that enhances views that the economy will improve. Recurrent government expenditure can and should be contained, but it is also very important that government spending on infrastructure actually expands and that it is evident that spending is on projects with greatest capacity to improve economic growth over time. As far as the RBA is concerned, interest rate stability, rather than further cuts, would represent the best mark that it is confident the economy is expanding.