Strongest lift in spending in six years

• Economy-wide spending has posted its strongest three-month period of growth in six years. According to the Commonwealth Bank Business Sales Indicator (BSI), spending rose by 1.0 per cent in May after a 1.2 per cent increase in April and 1.1 per cent gain in March. It was the biggest three-month lift in spending since the March-May period of 2007.
• The seasonally adjusted estimate of spending rose by 5.2 per cent in May, the strongest gain in over five years (since April 2008). The lift in the BSI in May follows a 0.1 per cent fall in April and a 1.3 per cent gain in March. Annual growth now stands at 10.3 per cent, up from 5.9 per cent in April and equalling the growth rate recorded in June 2012.
• The seasonally adjusted and trend estimates of the BSI results are derived via the SEASABS statistical program from the Australian Bureau of Statistics.
• At a sectoral level, seven of the 20 industry sectors contracted in trend terms in May, up from five sectors in both March and April. But none of the eight states and territories recorded weaker sales in trend terms in May – a situation that has now prevailed for eight months.
• The Commonwealth 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?

• Aussie consumers and businesses are spending a little bit more freely. According to the latest Commonwealth Bank Business Sales Indicator (BSI), economy-wide spending grew by 1 per cent in trend terms in May, after a 1.2 per cent lift in April and a 1.1 per cent gain in March.
• Retailers have reason to be more confident, and despite the recent fall in the Aussie dollar it is still a case of keeping prices lower to attract customers and prevent them flocking to overseas web sites.
• The Reserve Bank is unlikely to shift its rhetoric in the near future. The economy is improving of a low base, however the recovery is still fragile. An ongoing improvement in confidence is necessary to support activity levels, and the perception of lower interest rates will certainly support sentiment.

What do the figures show?

• The recovery in economy-wide spending is consolidating. According to the latest Commonwealth Bank Business Economy-wide spending is now recording firm growth, in marked contrast to the weakness exhibited from May to September last year. According to the latest Commonwealth Bank Business Sales Indicator (BSI), economy-wide spending grew by 1.0 per cent in trend terms in May, the ninth constructive monthly increase in spending. Over that past three months sales have lifted on average by 1.1 per cent a month – the strongest growth in six years.
• The seasonally-adjusted measure of sales leapt by 5.2 per cent in May – the strongest increase in five years. The BSI had previously eased by 0.1 per cent in April after lifting by 1.3 per cent in March. Annual growth in spending now stands at 10.3 per cent in seasonally adjusted terms, up from 5.9 per cent in April.
• The Commonwealth BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities. And in line with the practice of the Bureau of Statistics with its retail trade data, seasonally adjusted and trend estimates of the BSI are obtained by applying statistical software. The seasonally adjusted and trend BSI results are derived from the same SEASABS statistical software. This allows analysis of the broader underlying trends that may be hidden in the raw data.
• Across sectors, seven of the industry sectors fell in trend terms in May but declines were fairly modest. Amongst the weakest sectors in May were Mail Orders & Telephone Order Providers (down 1.6 per cent) with Automobiles & Vehicles, Business Services and Hotels & Motels all losing 0.6-0.7 per cent.
• In contrast the large Retail Stores sector (31.5 per cent of the BSI) rose by 2.3 per cent in May with both Utilities and Wholesale Distributors & Manufactures up 1.4 per cent.
• In annual terms in May, the BSI was up 7.4 per cent on a year ago – the best growth since December 2007. Six of the 20 industry sectors contracted in May, up from five sectors in April and four sectors in March. Spending in Business Services fell for the third straight month, down 6.2 per cent and the biggest fall in around 5½ years. And sales at Mail Orders & Telephone Order Providers fell at a 28.1 per cent annual pace in May after rising at an annual rate of around 20 per cent between March-June 2012.
• Strongest growth was recorded by the large Retail Stores sector, up 12.9 per cent on a year ago, while the Wholesale Distributors & Manufactures sector was up 11.0 per cent, followed by Utilities, up 9.2 per cent, Government services, up 8.6 per cent.
• None of the states and territories recorded weaker sales in trend terms in May. Sales rose most in NSW (up 1.9 per cent), followed by the ACT (up 1.5 per cent), South Australia (up 1.0 per cent), Queensland (up 0.6 per cent), Western Australia (up 0.3 per cent), Northern Territory and Victoria (up 0.2 per cent) and Tasmania (flat).
• The trend BSI has now risen for two years in the Northern Territory, for 23 straight months in both Queensland and South Australia, for 20 straight months in ACT and for 14 straight months in Tasmania.
• In annual terms, no state or territory had sales below a year ago. Strongest growth was posted in ACT (up 13.3 per cent), followed by South Australia (up 12.2 per cent), NSW (up 8.8 per cent), and Queensland (up 7.5 per cent).

What are the implications for interest rates and investors?

• Consumer spending is expanding at a reasonably constant rate across the country. Overall the economy remains patchy at present and policymakers will want more consistent readings on the economy before deciding on any shifts in monetary policy. CommSec expects the next rate cut to take place in August.