Company profits slumped by 6.5 per cent in the December quarter to stand 2.2 per cent higher than a year ago. In 2011 profits rose by just 2.1 per cent – the second worst performance in 17 years behind the Global Financial Crisis period.
- Inflation hits 2-year low: The TD Securities-Melbourne Institute monthly inflation gauge rose by just 0.1 per cent in February and stood just 2.0 per cent higher than a year ago – a 2-year low.
- Services sector slumps: The Performance of Services index slumped by 5.3 points to 46.7 in February. A reading below 50 suggests contracting activity. It was the fourth contraction in five months.
- New hiring back in vogue: The number of job advertisements rose by 3.3 per cent in February, after rising by 7.5 per cent in January.
What does it all mean?
- Clearly if interest rates are going anywhere in the short term, it is down. Profits barely rose in 2011, posting the second worst performance in the past 17 years behind the GFC period. In addition, data shows that inflation is under control while the services sector continues to move into reverse. Australian companies are certainly struggling at present, a fact borne out by the results over the latest profit reporting season.
- There is no inflation to speak of. The latest gauge from TD Securities suggests that inflation is growing at a 2.0 per cent annual pace – at the bottom of the Reserve Bank’s 2-3 per cent target band. And the Performance of Services index reports that retailers are still discounting heavily.
- Over the past year economy-wide profits grew by just 2.2 per cent. No wonder that businesses have been seeking to cut costs and have been reluctant to hire new staff.
- Inventories rose in the latest quarter but it hardly looks like a positive situation. Sales are rising only slowly so the lift in stock levels appears unintentional; certainly that appears the case in the retail sector. It is hard to believe that retailers were quick to stock up with goods to replenish previous sales. Past sales have hardly been impressive and it would have been a very optimistic retailer that put more stocks on the shelves on the prospect that they would be gobbled up by consumers.
- The main bit of good news is that businesses haven’t totally shut up shop and are still looking to take on staff. If the new hiring results in a net increase of people in jobs then economic activity should recover in the second half of 2012.
What do the figures show?
- Company gross operating profits fell by 6.5 per cent in the December quarter after lifting by 4.7 per cent in the September quarter. Profits have risen in just two of the past six quarters but are still up 2.2 per cent on a year ago.
- In 2011, Australian companies posted profits of $269 billion, up just 2.1 per cent over the year. Apart from the 13.7 per cent fall in profits in 2009 at the height of the global financial crisis, it was the worst profit performance in a calendar year since quarterly records were first maintained 17 years ago.
- Profits rose in 7 of the 15 industry sectors in the December quarter, led by Administrative and support services (up 12.4 per cent) and Electricity, gas & water services (up 4.7 per cent). Profits fell 57.3 per cent in Financial and insurance services followed by “Other Services” (down 49.1 per cent). Profits also fell in Mining (down 8.7 per cent), Manufacturing (down 5.1 per cent) and Construction (down 4.2 per cent).
- Sales rose in seven of the 15 industry groupings in real (inflation-adjusted) terms in the December quarter. Of the major sectors, sales rose by 1.7 per cent in Retail trade, 2.0 per cent in Wholesale trade and 3.1 per cent in Electricity, gas, water and waste services. But sales fell by 0.3 per cent in Mining, 0.2 per cent in Manufacturing and 0.8 per cent in Construction. Total real sales rose by 0.4 per cent in the December quarter to stand 2.7 per cent higher over the year. Excluding mining, sales also rose by 0.5 per cent in the quarter.
- In nominal terms sales fell in just three of the states and territories in the December quarter: NSW and South Australia (both down 1.0 per cent) and Victoria (down 0.6 per cent).
- Inventories rose by 1.4 per cent in the December quarter led by a 2.7 per cent lift in Retail stocks and 2.2 per cent lift in Mining stocks.
- Inventories fell in just Electricity, gas, water and waste services and Accommodation & food services.
- Wages and salaries rose by just 0.8 per cent in the December quarter – the smallest gain in two years – and largely reflecting higher salaries as employment was largely unchanged.
Inflation gauge
- The monthly inflation gauge rose by 0.1 per cent in February following a 0.2 per cent rise in January. The annual rate of inflation fell from 2.2 per cent to 2.0 per cent.
- The underlying rate (trimmed mean) rose by 0.1 per cent in February following a 0.3 per cent rise in January. The annual rate fell from 2.2 per cent to 2.1 per cent.
- Excluding volatile items like petrol and fruit & vegetables, the inflation gauge was unchanged in February after a 0.2 per cent rise in January. The annual rate fell from 2.3 per cent to 2.2 per cent.
- TD Securities noted that “Contributing to the overall change in February were price rises for fruit and vegetables, alcohol and tobacco, and automotive fuel. These were offset by a sharp seasonal fall in holiday travel and accommodation, as well as falls in furniture and furnishings, and financial services. The price of fruit and vegetables rose by 1.8 per cent in February, while fuel prices only rose by 0.5 per cent in the month.”
- TD Securities estimates that headline inflation will lift by 0.7 per cent in the March quarter as a whole, led by non-tradable inflation, with its trimmed mean measure also up by 0.7 per cent.
Job advertisements
- The combined number of internet and newspaper job advertisements, as tracked by ANZ, rose by 3.3 per cent in February after lifting by 7.5 per cent in January. Job ads have now risen three times in the past eight months. Job ads are up 3.6 per cent on a year ago.
Newspaper job ads actually fell by 8.6 per cent in February, while the far larger component of internet job ads rose by 3.8 per cent.
Services sector gauge
- The Australian Industry Group/Commonwealth Bank Australian Performance of Services index fell by 5.3 points to 46.7 in February. It was the fourth decline in the past five months for the services sector.
- All components of the index fell in February. Of note, the new orders sub-index slumped from 54.1 to a 12-month low of 45.6; the employment sub-index fell from 51.2 to 47.5; and sales fell from 49.4 to 47.5.
- According to the survey: “Retailers continue to report heavy discounting; the average selling prices index for the retail sub-sector is now at its lowest level since 2008.”
What is the importance of the economic data?
- The quarterly Business Indicators publication by the Bureau of Statistics contains measures such as inventories, company profits and income from sales. Higher inventory (stock) levels can be either intentional or unintentional. If stocks are low and sales are expected to rise in the future, businesses will seek to build up stocks. However an unintentional build-up in stocks is where sales fall short of expectations, leaving more goods on the shelves than desired. If profits are increasing then this may point to increased capital spending and employment in the future. Rising profits are also a sign of favourable business conditions.
- The monthly Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. But a fall in job advertisements would have a more immediate impact on monthly employment estimates.
- The TD Securities/Melbourne Institute Monthly Inflation Gauge is designed to “provide a timely and accurate monthly measure of inflation in Australia”. The Bureau of Statistics only releases the Consumer Price Index on a quarterly basis.
- The Performance of Services index is released by Australian Industry Group and the Commonwealth Bank each month. The PSI is designed to provide a guide to conditions in retail, financial and other service sectors.
What are the implications for interest rates and investors?
- Overwhelming the latest batch of data keeps the door open to further rate cuts. Inflation is under control, profits are falling, the services sector is contracting and sales aren’t meeting expectations, leading to higher inventories.
- The good news is that companies are hiring again. The main question is whether the scale of hiring will be enough to lead to a net increase in employment or whether the intake of new workers merely reflects the turnover of positions and natural increase of new entrants into the job market.