Construction work done; Wage price index

• Construction activity eases: Construction work done fell by 0.2 per cent in the December quarter. Residential work rose by 2.5 per cent but commercial building fell by 2.9 per cent while engineering work fell by 0.6 per cent.
• Building inflation: Annual inflation in the building sector (residential and commercial building) has lifted to a 6-year high of 2.8 per cent although engineering prices are up 0.5 per cent on a year ago – a 4-year low.
• Wages rose by 0.6 per cent in the December quarter to be up 2.5 per cent for the year – the slowest rate on record. Annual growth of wages (including bonuses) eased from an 18-month high of 2.8 per cent to 2.7 per cent. Wages were up only 1.7 per cent over the year in the ACT.

What does it all mean?

• The Reserve Bank can cut rates further if it believes the economy needs a little more help. Wages are growing only modestly – keeping inflationary pressures contained and restraining consumer spending. And overall construction activity is little changed with strong home building offsetting weaker activity in commercial building and engineering sectors.
• While the Reserve Bank needs to keep a watch on price pressures in home building, they are balanced across the construction sector by soft price growth in commercial building and engineering.

What do the figures show?

Construction Work

• Construction work done fell by 0.2 per cent in real (inflation-adjusted) terms in the December quarter after falling by 2.8 per cent in the September quarter and falling by 2.0 per cent in the June. Work done is down by 4.8 per cent on a year ago. Public sector construction work fell by 0.2 per cent in the quarter while private sector activity fell by 0.1 per cent.
• Construction work fell in just two of the states and territories in the December quarter. Leading the falls was Queensland (down 5.7 per cent) followed by ACT (down 5.0 per cent). Leading the gains was Western Australia (up 3.6 per cent), Northern Territory (up 1.6 per cent to record highs), Victoria (up 1.5 per cent), NSW and South Australia (both up 0.2 per cent) and Tasmania (up 0.1 per cent)
• Engineering work fell by 0.6 per cent in the December quarter, the fifth straight fall after dropping 3.6 per cent in the September quarter. Private sector work fell by 1.6 per cent in the quarter while public sector work rose by 3.1 per cent. Engineering construction is down by 12.3 per cent on a year ago.
• Commercial (non-residential) building fell by 2.9 per cent in the December quarter (private sector down 1.5 per cent) to be down by 2.6 per cent over the year.
• Residential building rose by 2.5 per cent in the December quarter (private sector up 2.9 per cent) – the third gain in four quarters. Residential building is up by 12.7 per cent over the year. Alterations & additions fell by 2.6 per cent in the December quarter while new residential work rose by 3.2 per cent.
• The measure of inflation in the construction sector (deflator) rose by 0.3 per cent in the December quarter after rising by 0.4 per cent in the September quarter and rising by 0.6 per cent in the June quarter. The annual rate of construction inflation eased from 1.8 per cent to 1.5 per cent. Engineering prices rose by 0.1 per cent in the quarter (0.5 per cent annual) while building prices rose by 0.5 per cent in the quarter (2.8 per cent annual). Building inflation is at 6-year highs.
• Home building prices are up 3.0 per cent over the year to December while commercial building inflation stands at 2.2 per cent.

Wage price index

• The wage price index rose by 0.6 per cent in the December quarter after similar gains in the September and June quarters. Annual wage growth fell to a record (17-year) low of 2.5 per cent. To two decimal points, annual wage growth eased from 2.58 per cent to a record low of 2.47 per cent in the December quarter.
• Private sector wages rose by 0.6 per cent in the quarter while public sector wages rose by 0.7 per cent. Annual growth of private sector wages held at 2.5 per cent, up from the record low of 2.4 per cent in the June quarter while public sector wage growth was steady at 2.7 per cent.
• Including bonuses, wages rose by 0.6 per cent in original terms in the December quarter. Annual growth of wages at total hourly wage rates including bonuses eased from an 18-month high of 2.8 per cent to 2.7 per cent.
• Industries with fastest annual wage growth: Arts & recreation services and Education & training (both up 3.4 per cent) followed by Electricity, gas, water & waste services (up 3.0 per cent).
• Industries with slowest annual wage growth: Professional, scientific and technical services (up 1.9 per cent); Administrative and support services (up 2.0 per cent) and Public administration and safety (up 2.1 per cent).
• Annual wage growth across States & Territories: NSW, 2.4 per cent; Victoria, 2.8 per cent; Queensland, 2.6 per cent; South Australia, 2.6 per cent; Western Australia, 2.3 per cent; Tasmania, 2.5 per cent; Northern Territory, 2.8 per cent; and ACT, 1.7 per cent.
• The Bureau of Statistics releases quarterly estimates of Construction work done. The estimates are based on a survey and cover around 80 per cent of the construction work done in the period. Revised estimates will be released in coming months. The data is useful largely for historical purposes but the work yet to be done estimates provide an early warning signal of future activity. The residential work figures give a good early guide to the strength of residential investment in the national accounts.
• 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).
• Work levels in the engineering sector will continue to recede over the coming year, affecting prospects for construction companies and mining services firms. But home building activity will continue to lift to fresh record highs over 2015.
• Investors need to watch inflationary pressures in the building sector – especially home building. Demand for trades in home building is strong at present. Annual inflation in the renovation sector stands at 3.7 per cent with inflation in the new home building sector at 2.9 per cent.
• Wage pressures are contained. And on both accounts this will keep the leaning to lower interest rates. Wage growth is modest, keeping inflationary pressures contained. And if wages are barely covering inflation, that serves to restrain consumer spending. The Reserve Bank may decide to cut rates again next week and then retire to the sidelines. Alternatively the Reserve Bank may keep another rate cut up its sleeves in case momentum in the economy eases further.

What is the importance of the economic data?

• The Bureau of Statistics releases quarterly estimates of Construction work done. The estimates are based on a survey and cover around 80 per cent of the construction work done in the period. Revised estimates will be released in coming months. The data is useful largely for historical purposes but the work yet to be done estimates provide an early warning signal of future activity. The residential work figures give a good early guide to the strength of residential investment in the national accounts.
• 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).

What are the implications for interest rates and investors?

• Work levels in the engineering sector will continue to recede over the coming year, affecting prospects for construction companies and mining services firms. But home building activity will continue to lift to fresh record highs over 2015.
• Investors need to watch inflationary pressures in the building sector – especially home building. Demand for trades in home building is strong at present. Annual inflation in the renovation sector stands at 3.7 per cent with inflation in the new home building sector at 2.9 per cent.
• Wage pressures are contained. And on both accounts this will keep the leaning to lower interest rates. Wage growth is modest, keeping inflationary pressures contained. And if wages are barely covering inflation, that serves to restrain consumer spending. The Reserve Bank may decide to cut rates again next week and then retire to the sidelines. Alternatively the Reserve Bank may keep another rate cut up its sleeves in case momentum in the economy eases further.