Best annual wages growth in three and a half years

Wage Price Index; Consumer sentiment

• Wages: The wage price index rose by 0.6 per cent in the September quarter following a downwardly- revised 0.5 per cent increase (previously +0.6 per cent) in the June quarter. To 2-decimal points, annual wage growth lifted from 2.14 per cent to a 31⁄2-year high of 2.29 per cent.
• Bonuses paid: Including bonuses (ordinary time hourly rates), wages rose by 0.8 per cent – the most in 3 years – in the September quarter to be up by 2.7 per cent on a year ago, up from 2.5 per cent in the June quarter.
• Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index rose by 2.8 per cent to a reading of 104.3 in November. The sentiment index is above its long-term average of 101.5. A reading above 100 denotes optimism.
• Housing outlook: Consumers’ views on whether it was a good ‘time to buy a dwelling’ rose by 11.8 per cent to a 31⁄2-year high of 114.8 and is up 16.7 per cent over the year to November. And consumers in Sydney showed a strong gain of 37.0 per cent to 131.9 in November, up from 96.3 in October – the strongest level in 5 years.

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The data on wages highlights the costs faced by businesses and gives insights into future interest rate decisions.

What does it all mean?

• The steady pick-up in our pay packets continues. Over the year to September, wages grew at the quickest pace since March 2015. Importantly, it is further confirmation that wage growth has bottomed and should continue to gradually lift as the labour market tightens.
• In yesterday’s NAB Business Survey release for October, the proportion of Aussie businesses reporting skills shortages in the mining, construction, manufacturing, retail, wholesale trade, transport and storage, finance, business and property services, and the recreation and personal services industries were well above the long-run average going back to June 30 2000. Therefore, it was no surprise to see the utilities, mining and transport industries achieving the biggest annual pay gains between the June and September quarters.
• And those Aussies working in health and social assistance, education and the public sector are benefitting from solid jobs growth over the past year, with wages lifting by the most (up by 2.5-2.8 per cent) in these industries over the past year.
• Employers continue to top up wages with bonus payments. Wages are up 2.7 per cent on a year ago if bonus payments are included, well ahead of the 1.9 per cent headline inflation rate.
• As always, it’s important to relate wages to prices. Wage growth is slower than in the past, but so is price inflation. Wages are ahead of prices, especially when you use a broader measure of prices – the household consumption deflator. And positive real wage growth is good for spending.
• Aussie consumer confidence continues to bounce around, but the number of optimistic Aussie households (surveyed level above 100) has exceeded the number of pessimists for 12 consecutive months. And consumers continue to defy the ‘gloomsters’ on views of the housing market. In fact, some Sydneysiders appear to see some upside to falling home prices due to better affordability. Those surveyed in the Emerald City that considered it a good ‘time to buy a dwelling’ surged in November with the sub-index at its highest level since September 2013.

What do the figures show?

Wage price index

• The wage price index rose by 0.6 per cent in the September quarter following a downwardly-revised 0.5 per cent increase (previously +0.6 per cent) in the June quarter. Annual wage growth lifted from 2.1 per cent to 2.3 per cent.
• To 2-decimal points, wages rose 0.62 per cent in the September quarter – the biggest increase in 41⁄2 years. Annual growth lifted from 2.14 per cent to a 31⁄2-year high of 2.29 per cent.
• The ABS reported that “There was a higher rate of wage growth recorded across the majority of industries in comparison to this time last year, reflecting the influence of improved labour market conditions”.
• Private sector wages rose by 0.5 per cent in the September quarter while public sector wages rose by 0.6 per cent. Annual growth of private sector wages was steady at 2.1 per cent. Annual growth of public sector wages lifted from 2.4 per cent to 2.5 per cent.
• Including bonuses (ordinary time hourly rates), wages rose by 0.8 per cent – the most in 3 years – in the September quarter to be up by 2.7 per cent on a year ago, up from 2.5 per cent in the June quarter.
• Industries with fastest annual wage growth: Health care & social assistance (up by 2.8 per cent); Education & training (up by 2.7 per cent); and Utilities (up by 2.7 per cent).
• Industries with slowest annual wage growth: Mining (up by 1.8 per cent); Retail trade (up by 1.8 per cent); Communications (up by 1.9 per cent); and Construction (up by 1.9 per cent).
• Annual wage growth across States & Territories: NSW, 2.4 per cent; Victoria, 2.5 per cent; Queensland, 2.3 per cent; South Australia, 2.2 per cent; Western Australia, 1.6 per cent; Tasmania, 2.6 per cent; Northern Territory, 1.7 per cent; and ACT, 2.2 per cent.
• In terms of real wage growth, doing best is Queensland; wages are up 2.3 per cent versus 1.8 per cent inflation. But real wage growth is -0.3 percentage points in the ACT.

Consumer confidence

• The Westpac/Melbourne Institute survey of consumer sentiment index rose by 2.8 per cent to 104.3 in November. The sentiment index is above its long-term average of 101.5. A reading above 100 denotes optimism. The survey of 1,200 people was conducted from November 5-9.
• The current conditions index was unchanged, but the expectations index rose by 4.7 per cent.
• Four of the five of the components of the index increased in November:
  • The estimate of family finances compared with a year ago rose by 4.9 per cent;
  • The estimate of family finances over the next year rose by 3.2 per cent;
  • Economic conditions over the next 12 months rose by 1.7 per cent;
  • Economic conditions over the next 5 years rose by 9.7 per cent;
  • The measure on whether it was a good time to buy a major household item fell by 3.5 per cent.
• Housing outlook: A good time to buy a dwelling? The index rose by 11.8 per cent and is up 16.7 per cent over the year to November. House price expectations fell by 2.3 per cent to be down by 27.0 per cent on a year ago.
• Unemployment expectations: Unemployment expectations fell by 1.9 per cent in November and are down by 7.9 per cent over the year. The Unemployment Expectations index at 120.4 is at the second lowest level in 71⁄2 years.

What is the importance of the economic data?

• 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).
• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

• Today’s wages growth and consumer confidence data are both encouraging. Pay is lifting gradually off low levels and households remain optimistic, despite wealth headwinds associated with falling home prices and sharemarket volatility.
• Household consumption still remains a wildcard. While consumers remain positive about the solid jobs market with unemployment expectations near 71⁄2-year lows, Westpac did highlight in its annual question on consumer Christmas spending plans that “a third of Australians expect to spend less on gifts than they did last year, with 56 per cent expecting to spend about the same and just 10 per cent expecting to spend more” in the lead-up to the all-important Aussie Christmas retail trading period.
• That said, Reserve Bank forecasts continue to be met. The economy is moving in the right direction. Eventually wage growth will lift to the more ‘normal’ range of 3-4 per cent but the process will only be gradual. In the UK and US, annual wages growth has hit decade highs of around 3 per cent in recent months with unemployment rates of 3.7–4.1 per cent.
• There is still spare capacity in the Aussie labour market and the unemployment rate will need to come down further for wage growth to lift inflation. For example, in NSW and Victoria, the unemployment rates are around 4.4-4.5 per cent, but annual wages growth is still 2.4-2.5 per cent in both states. All eyes are now on tomorrow’s jobs report release.
• CommSec doesn’t expect a change in interest rates until late 2019.

Ryan Felsman, Senior Economist