Record company profits; Best sales in a decade

Business Indicators; International aviation; Building approvals; Job Ads

• Profits: Company operating profits rose for the sixth straight quarter, up 0.8 per cent in the December quarter. Profits were up 10.5 per cent on the year. In the year to December, profits hit a record high of $354.6 billion, up 10.6 per cent on a year earlier.
• Sales: Over the year to December, real sales were up 2.1 per cent on a year earlier, down from 2.7 per cent in the September quarter and down from 3.2 per cent in the June quarter (June quarter annual sales recorded the strongest growth in 9½ years).
• International air traffic lifts: International scheduled passenger traffic through Australian airports increased to 3.95 million in December 2018 from 3.83 million in December 2017 – an increase of 3.1 per cent. Passenger traffic over the year to December was a record-high 41.571 million, up by 4.9 per cent.
• Building approvals: Council approvals to build new homes rose by 2.5 per cent in January to be down by 28.6 per cent over the year. Approvals remain near 5-year lows. But Tasmanian dwelling approvals are at 7½-year highs.
• Job advertisements: ANZ job advertisements fell by 0.9 per cent in February. Ads were down by 4.3 per cent over the year and down by 5.1 per cent on 7-year highs set in May.

The job advertisements data is a leading indicator of the job market and therefore important for consumer-focussed stocks and companies such as SEEK. The Business Indicators data provides a guide to how industry sectors are faring – including data on profits, sales, inventories and wages. Aviation activity data is important for airlines and hotels.

What does it all mean?

• Corporate Australia is in good shape, despite the more challenging political and economic backdrop. Business conditions have eased off record highs in recent months, but firms look set to drive the economy over the coming year. Profits are at record highs and annual nominal sales growth is the strongest in a decade. And – as we saw last week – investment expectations continue to lift.
• The weaker Aussie dollar is a tourist magnet and airlines are benefiting. In fact, a record 41.6 million passengers travelled through Australia’s international airport terminals over the year to December. International carriers are responding to increased demand from overseas tourists with the number of seats on flights to/from Australia lifting by almost 2 per cent to 4.9 million over the 12 months to December.
• Home building activity is slowing in response to falling home prices. Building approvals remain volatile, but have peaked across capital cities, pointing to a peak in residential home construction. That said, a solid pipeline of residential building works remains in place, but the baton has well and truly been handed over to public-sector funded infrastructure construction and commercial property building.
• The ANZ job ads data continues to ease, but may not be picking up the new hiring trends such as candidates going straight to prospective employer websites or using social media sites such as LinkedIn.

What do the figures show?

Business Indicators

• Company operating profits rose for the sixth straight quarter, up 0.8 per cent in the December quarter. Profits were up 10.5 per cent on the year.
• Profits rose in seven of the 15 industry groups in the December quarter. Profits rose most in Accommodation and food services (up 10.0 per cent) but fell most in “Financial and insurance services” (down 26.6 per cent).
• In the year to December, profits hit a record high of $354.6 billion, up 10.6 per cent on a year earlier. (CommSec found that listed company profits rose by 15.3 per cent over the past year.)
• In rolling annual terms, mining operating profits rose by 19.7 per cent for the year to December to a record high of $130.7 billion. Non-mining profits rose by 5.1 per cent to a record $223.8 billion.
• Unincorporated gross operating profits rose by 1.4 per cent in the December quarter after falling 2.2 per cent in the September quarter. Business gross operating profits rose for the fifth straight quarter, up 0.9 per cent. Company profits before tax rose by 3.3 per cent in the December quarter after rising 6.2 per cent in the September quarter.
• Inventories fell 0.2 per cent in the December quarter after falling 0.1 per cent in the September quarter. Three industries reported higher stocks and the other three fell. Accommodation and food services stocks rose the most, up 6.9 per cent. Mining stocks fell 2.8 per cent.
• Real sales rose in seven of the 15 industry sectors in the December quarter. Sales rose the most in Arts and recreation services (up 3.3 per cent). Sales fell most in Financial and insurance services (down 2.9 per cent).
• The total value of sales fell by 0.3 per cent in the December quarter to be up 0.7 per cent over the year (decade average 1.4 per cent). Over the year to December, sales were up 2.1 per cent on a year earlier, down from 2.7 per cent in the September quarter and down from 3.2 per cent in the June quarter (June quarter annual sales recorded the strongest growth in 9½ years).
• In current prices, sales rose by 6.2 per cent in 2018, just off the strongest growth rate in a decade.
• In current prices, sales rose in four states and territories in the December quarter: NSW (up 0.5 per cent), Victoria (up 0.5 per cent), Queensland (down 0.6 per cent), South Australia (down 0.5 per cent), Western Australia (up 1.1 per cent), Tasmania (down 1.4 per cent); Northern Territory (up 0.1 per cent) and ACT (down 1.2 per cent).
• Wages & salaries (includes changes in wages and employment) rose by 0.8 per cent in the December quarter to be up 4.1 per cent on the year.

International air traffic

•  According to the Bureau of Infrastructure, Transport and Regional Economics (BITRE) international scheduled passenger traffic in December 2018 was 3.947 million compared to 3.827 million in December 2017 – an increase of 3.1 per cent.
• Passenger traffic for the year ended December 2018 was a record-high 41.571 million, up by 4.9 per cent.
• Total seats made available on international scheduled operations to/from Australia in December 2018 were 4.909 million – an increase of 2.0 per cent over the year. Overall seat utilisation increased from 82.5 per cent in December 2017 to 82.7 per cent in December 2018.
• The Qantas group – Qantas Airways, Jetstar and Jetstar Asia – accounted for 25.2 per cent of total passenger carriage in December 2018. The group’s share in December 2017 was 24.5 per cent.
• The share of passenger traffic accounted for by Australian designated airlines has increased from 29.9 per cent in December 2017 to 31.5 per cent in December 2018.
• Low-cost carriers, AirAsia X, Cebu Pacific Air, Indonesia AirAsia, Jetstar, Jetstar Asia and Scoot Tigerair accounted for 14.5 per cent of total international passenger traffic in December 2018. The low-cost carriers’ share in December 2017 was 15.1 per cent.

Building Approvals

• Council approvals to build new homes rose by 2.5 per cent in January to be down by 28.6 per cent over the year. Approvals remain near 5-year lows.
• House approvals rose by 1.9 per cent and apartment approvals rose by 3.8 per cent.
• In trend terms, overall approvals fell by 3.2 per cent. House approvals fell by 0.5 per cent and apartment approvals were down by 8.1 per cent.
• Over the past year 206,680 new homes were approved – a 4-year low and down from the record high of 242,862 in the year to August 2016.
• Dwelling approvals across states/territories in January: NSW (up 12.0 per cent); Victoria (down 7.9 per cent); Queensland (down 3.5 per cent); South Australia (down 1.5 per cent); Western Australia (up 28.8 per cent); Tasmania (up 15.4 per cent). Trend terms: Northern Territory (down 8.0 per cent); ACT (down 19.8 per cent).
• The value of all commercial and residential building approvals rose by 1.3 per cent in January to be down 15.8 per cent on the year. Residential approvals fell by 2.0 per cent; new building fell by 1.9 per cent; alterations & additions fell by 2.2 per cent. Commercial building rose by 6.4 per cent after falling by 9.8 per cent in December.

Job advertisements

• ANZ job advertisements fell by 0.9 per cent in February to be down 4.3 per cent on the year – the weakest growth rate in four years. Ads are now down 5.1 per cent on recent 7-year highs set in May. In trend terms, job ads fell 0.7 per cent to be down 2.8 per cent on a year ago.

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 Bureau of Infrastructure, Transport and Regional Economics (BITRE) releases data on domestic and international aviation each month. The data is useful in tracking consumer spending and airline performance.

·         The Bureau of Statistics’ monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for construction-related companies.

·         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.

What are the implications for interest rates and investors?
·         The pulse of the economy remains solid, supported by record-low interest rates. Exports and sales are rising, businesses are lifting profits and, in turn, they are hiring more workers, paying higher salaries and investing. Of course, the growing disparity between the share of corporate profits relative to the wages looks set to be a Federal election policy battleground.

·         Downside risks posed by the global economic slowdown, domestic property downturn and forthcoming New South Wales and Federal elections, point to an uncertain near-term future for households and businesses. All eyes will be on the Federal Budget in a month’s time when additional tax cuts are expected to be unveiled.

·         The modest stabilisation in building approvals in January is welcomed, but residential housing activity is softer across the nation. That said, home building remains firm in Tasmania in contrast to the Northern Territory which is weak, reflecting stark differences in economic conditions.

·         There is encouraging data on the Western Australian economy with building approvals up sharply in January and sales up solidly in the December quarter.

·         CommSec expects interest rates to be unchanged for the foreseeable future.