• Industry employment: Employment rose by 119,800 over the three months to August – the biggest quarterly increase in over almost a decade (since November 2004).
• Mining jobs fall: Mining employment fell by a record 27,100 jobs in the August quarter.
• More jobs in Education than Manufacturing. The number of people employed in the Education & Training sector now exceeds those employed in Manufacturing for the first time.

What does it all mean?

• The baton continues to be passed from mining to other parts of the economy. In the past three months, a record 27,100 jobs were lost in mining after falls in the previous six months. But more importantly, the jobs lost in mining and parts of the public service are being more than absorbed in other parts of the economy.
• The latest data confirms large scale job creation in the three months to August with more jobs created than at any three month period in a decade. More people in jobs, means more spending and therefore more momentum for the economy.
• Many Australians are still rubbing their eyes about the extent of job creation in the economy. But it is important to note that 97 per cent of businesses in the economy employ less than 20 people (88 per cent have less than four staff). And if small and medium-sized business picks up an extra worker here and an extra worker there, it all adds up.
• The Reserve Bank won’t be in a rush to change monetary policy settings. The RBA wants to ensure that the ‘baton change’ goes seamlessly and will make sure the baton isn’t dropped along the way.
• Australia continues to change from a manufacturing nation to that focussed on services. Thirty years ago manufacturing employed double the number of jobs as the education sector. Even a decade ago there were 30 per cent more people in manufacturing than education. Hopefully this new focus on education and training means a regular supply of productive staff for businesses.

What does the data show?

Industry employment:

• Economy-wide employment rose by 119,800 in the three months to August 2014 – the fastest growth in almost a decade (since the three months to November 2004). Over the year jobs rose by 252,500 – the most in three years.
• Employment rose in 13 of the 19 industry sectors. Employment rose most in Education & Training (up 31,800), followed by Health Care & Social Assistance (up 30,400) and Retail Trade (up 26,200).
• In the quarter, jobs fell the most in Mining (down by a record 27,100) followed by Administrative and Support Services (down by 23,400) and Public Administration and Safety (down by 14,900)
• Healthcare remains the biggest employer with 1.42 million employees (12.2 per cent of the total) followed by Retail Trade (1.26 million jobs or 10.8 per cent) and Construction (1.05 million or 9.0 per cent).
• Education & Training sector has passed Manufacturing for the first time in terms of people employed. Education & Training is the fifth largest employer with 937,600 jobs with Manufacturing at 917,900 jobs.

What is the importance of the report?

• The Australian Bureau of Statistics (ABS) provides detailed labour market figures one week after releasing ‘top level’ statistics of employment & unemployment levels across states and territories. The detailed data is useful in identifying broader underlying trends and instructive about the health of the economy.
• In the broader (macro) economy, the job market trends are positive. More in jobs, and more businesses looking for staff. The lift in productivity and weak wage growth are further positives for the hiring of staff. And more people in work, means more spending. Jobs lost in some sectors are being picked up in others.
• But at a regional level, the changes in the job market mean a degree of pain is being felt. Mining regions are shedding jobs, causing workers to travel farther afield to get jobs or to shift into other industries such as construction.
• The Reserve Bank will continue to monitor the ‘baton change’ but it must be happy with what it sees. Rates clearly won’t be cut in coming months, but it is still too early to talk about rate hikes, especially with inflation well contained.

What are the implications for interest rates and investors?

• In the broader (macro) economy, the job market trends are positive. More in jobs, and more businesses looking for staff. The lift in productivity and weak wage growth are further positives for the hiring of staff. And more people in work, means more spending. Jobs lost in some sectors are being picked up in others.
• But at a regional level, the changes in the job market mean a degree of pain is being felt. Mining regions are shedding jobs, causing workers to travel farther afield to get jobs or to shift into other industries such as construction.
• The Reserve Bank will continue to monitor the ‘baton change’ but it must be happy with what it sees. Rates clearly won’t be cut in coming months, but it is still too early to talk about rate hikes, especially with inflation well contained.

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What does it all mean?

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• The US economy is yet again reinventing itself. This has been helped along by a determination to get the US economy moving again after the global financial crisis but the real drivers are an energy boom, a manufacturing renaissance and American innovation.
• Together these drivers could add as much as 0.5% to annual US economic growth in the decade ahead.
• For investors, while a return to the sustained double digit share market returns seen through the 1980s and 1990s is unlikely, the turn for the better in the US is likely driving a new secular bull market in traditional global shares.

Introduction

Economic growth a strong possibility for the US.

The problems with the US economy are well known. Its level of public debt is too high, its spending on social security and health is unsustainable, its health system is woefully inefficient – spending more relative to GDP than most OECD countries but with worse life expectancy – its level of savings is too low, its transport infrastructure is becoming run down, its political system seems dominated by ideology and its share market has had a rough time over the last 14 years as the tech and housing credit booms burst.

But it is dangerous to write the US off. Every two or three decades it seems to reinvent itself. It did it with electricity and mass production in the 1920s, with consumerism, petrochemicals and aviation in the 1950s and 1960s and with deregulation and the IT revolution in the 1980s and 1990s.

Don’t write the US off

The US was written off by many during the 1930s only to see it emerge as the world’s major super power and strongest economy in the post war years. The same occurred in the 1970s after the debacles of the Vietnam War, Watergate and stagflation only to see it reinvigorated by Ronald Reagan. Both the 1950s-1960s and the 1980s-1990s saw strong returns from the US share market.

After the debacle of the tech wreck and credit bust of last decade and the loss of its AAA credit rating by S&P, amidst dysfunctional politics, many have been tempted yet again to write the US off. But once more it seems to be bouncing back. This time around the drivers include: American policy makers’ determination to fix their problems; an energy boom; a manufacturing renaissance; and ongoing innovation.

The Fed and the shrinking US budget deficit

American policy makers are criticised a lot, eg for first undertaking quantitative easing and now for slowing it! But they do show a determination to fix things up once they go wrong and for moving a lot faster than other countries. This has been evident since the GFC with the Federal Reserve trying one approach after another to stabilise and then get the US economy moving again and the forced recapitalisation of US banks, which helped restore confidence. That these policies are working is evident in the Fed now moving to slow down its quantitative easing program, effectively taking the US off life support as it appears to be getting to the point where it no longer needs it.

But perhaps the big surprise for many is the massive slump in the US budget deficit over the last few years, which basically explains why you don’t hear much about it these days. As can be seen in the next chart the US Federal budget deficit has shrunk from more than 10% of GDP In 2009 to less than 3% of GDP this year. This reflects a combination of stagnant government spending over the last few years and surging revenue growth.

It is expected to start rising again beyond 2015 to around 4% of GDP by 2022 (according to the Congressional Budget Office) as an aging population really starts to boost spending on social security and health, so there is still more to do. But the savings from the 2011 debt agreement, the scaled back “fiscal cliff” and the “sequester” spending cuts add up to almost $US4 trillion over 10 years and should not be ignored. It’s a long way from the fiscal mess of a few years ago.

The energy boom

It seems only yesterday that the “peak oil” fanatics were raving on (yet again) about how global oil production would soon peak and we would have to ditch the car and return to the horse and buggy. It was nonsense then and even more so now. The basic thing they missed is that rising oil prices will both lead to more fuel efficiencies (just look at all the hybrid cars now available) and make economic access to new supplies of energy viable. This is happening in the US with a vengeance as fracking technology – drilling down and then sideways into shale beds and then pumping in a mix of water and chemicals to fracture the rock allowing gas and oil to be extracted – is leading to a massive energy production boom. US oil production is up around 45% over the last five years which has taken it back to 1990s levels and total energy production including gas is back to late 1980s levels. See the next chart. By around 2020, US oil production is likely to have returned to 1970 levels and the US will be back to being the world’s biggest oil producer.

The energy boom is providing a huge boost to the US economy by boosting demand for drilling services and infrastructure, lowering energy costs & reducing the US trade deficit. US oil is trading around $US7 a barrel below global prices and US natural gas prices are tending to run around one third below European levels and one fifth of Japanese levels. Rough estimates put the boost to US economic growth from the energy boom at 0.2% per annum. The decline in US oil imports can be seen in the next chart. This also means less dependence on the volatile Middle East.

The manufacturing renaissance

Numerous companies have announced that they plan to expand manufacturing production capacity in the US. This ranges from a plant to build a Honda super car to Apple bringing some component manufacturing home. The drivers have been a combination of:

• lower energy costs as cheap gas has seen electricity suppliers switch to gas, depressing the price of electricity;
• very low unit labour costs – as solid productivity growth and low wages growth have seen unit labour costs for manufacturers remain around 1980 levels; and
• the low $US after a decade long decline, which is still down 30% or so from 2001/2002 levels.

As yet this has only resulted in a tentative rise in manufacturing production relative to overall GDP, but it is likely to improve further as the manufacturing base starts to expand again. Very different to Australia, but then again we have seen a doubling in the value of the $A over the last decade, somewhat higher wages growth and surging electricity prices…but that’s a different story!

American ingenuity

Finally, underpinning all of this is American ingenuity and an economic system that encourages it and provides it with finance. The bulk of the new gadgets we get are developed in the US, it remains at the forefront of the IT revolution and its companies are world beaters. Since 1975, the Eurozone has given rise to just one of the firms to join the world’s top 500 companies, whereas 26 of them came from the US.

What does it mean for investors?

The key message is that the US is getting back in business (putting aside the winter freeze) with a potential to grow maybe as much as 0.5% pa more over the medium term compared to what otherwise would have been the case. There are several implications for investors. First, a stronger US economy is good for the global economy and supports the view that global share markets have entered a new secular (or longer term) bull market. Consistent with this, US shares have broken out to a new record high – both in terms of the S&P 500 price index and in terms of real returns after spinning their wheels since March 2000. See the next chart.

Second, the US looking stronger at a time when several emerging countries have hit a more difficult patch favours traditional global shares over emerging market shares.

Finally, whilst US and hence global shares appear to have entered a new secular bull market, returns are likely to be more constrained than was the case during the last secular bull market that started in 1982. This is because starting point valuations for shares are not as attractive as in 1982 and the boost from falling inflation and interest rates won’t be repeated again in the years ahead as inflation is already low.

By Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital

———-

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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Home Prices; Manufacturing gauge; Retail trade; New home sales

• 

  Home sales, retail and manufacturing all on the up.

  Home prices up: The RP Data – Rismark Home Value index of capital city home prices rose by 1.6 per cent in September to record highs. Home prices are up 5.5 per cent on a year ago. But prices rose in just three capital cities in September.

• Manufacturing activity up; now at a 2-year high: The Performance of Manufacturing index rose by 5.3 points to a 2-year high of 51.7 in September. Any reading above 50 suggests manufacturing is expanding.
• Home sales up: New home sales rose by 3.4 per cent in August after a 4.7 per cent decline in July.
• Retail spending up: Retail trade rose by 0.4 per cent in August, just above market forecasts.
• Chinese manufacturing improves: The “official” purchasing manager’s index (from National Bureau of Statistics) rose from 51.0 to 51.1 in September, below forecasts for a result near 51.5.

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• The Performance of Manufacturing index fell from 51.1 to 47.9 in March – marking the sixth contraction in the sector in the space of seven months
• Key sub-indexes were mostly weak with new orders, exports and employment still contracting. The employment sub index was at its lowest level in 21 months.

What does it all mean?

• The latest reading on the manufacturing sector has certainly been disappointing, especially given the modest improvement in the prior month. The manufacturing sector has now contracted for six out of the past seven months. In fact the key forward looking sub indices like new orders is once again contracting, while the employment sub index is at its lowest levels in just shy of two years. Even manufacturing exports are contracting at a faster pace and more importantly given the recent strength in the Australian dollar it is unlikely that activity levels will bounce back anytime soon. The lack of momentum in the manufacturing sector encapsulates what’s taking place across an array of sectors throughout the economy.
• The strength of the Australian dollar is making exports less competitive but on it is also ensuring that the cost of imported goods is falling – a result which has been reflected by the slide in manufacturing input costs. On an even more encouraging note average manufacturing selling prices have risen to the best levels in over two years – albeit from a very low base. It is unlikely that a full blown recovery will take place in the manufacturing sector anytime soon but the rebuilding following the floods could support the sector in coming months.

What do the figures show?

Performance of Manufacturing Index

• The Performance of Manufacturing index fell from 51.1 to 47.9 in March, marking the sixth contraction in the sector in the space of seven months.
• Key activity components of the PMI were mostly weaker in March. New orders were once again contracting, while production recorded a modest improvement. The employment sub index was now contracting at an even faster pace with the index at the lowest levels in 21 months.
• The production sub index rose 1.6 points to 50.3; new orders fell by 3.2 points to 49.1; the employment index fell 1.3 points to 43.7; exports fell by 1 point to 48.2; the index of selling prices rose modestly from 51 to 54.7, while input prices fell by 7.4 points to 67.8 and wages also eased marginally.

What is the importance of the economic data?

• The monthly Performance of Manufacturing Index is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

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• Retail spending grew by 0.4 per cent in January – in line with the Commonwealth Bank Business Sales Indicator which was released two weeks ago. Over the past year retail trade lifted by just 1.8 per cent.
• Non-food retailing fell by 1.0 per cent in the month with annualised growth of just 0.3 per cent – marking the weakest growth rate in 26 months. Sales at smaller retailers fell by 1.6 per cent in February. In annual terms growth was just 0.2 per cent – a 10 month low.
• The Performance of Manufacturing index improved from 46.7 to 51.1 in February – marking the first expansion in the sector in six months. Key sub-indexes were mixed with new orders surging to seven month highs, while production, and employment contracted at a faster pace.
• The broad measure of Australia’s external position – the current account – deteriorated in the December quarter due to higher income payments. The deficit rose by $809 million to $7.3 billion.
• In calendar 2010 the current account deficit stood at 2.6 per cent of GDP – the smallest deficit in eight years.
• The terms of trade (ratio of export to import prices) hit a record high in the December quarter, courtesy of lower import prices. The services terms of trade soared 6.0 per cent to record highs. Overall CommSec expects that the economy grew by around 0.9 per cent in the December quarter.

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• The NAB business confidence index fell from +6.2 to -2.7 in December – the weakest reading in 20 months. The business conditions index rose from +3.7 in November to +5.8 in December. Excluding Queensland the confidence reading fell to +1.0, while conditions rose to +9.0.
• Forward looking sub-indices remained decidedly weak despite modest improvements. Profits ticked marginally higher as did employment, however the pace of contraction in new orders increased.
• The Performance of Manufacturing index improved from 46.3 to 46.7 in January. Any reading above 50 means the manufacturing sector is expanding. Key sub-indexes were mostly weak with new orders, exports and employment still contracting.

What does it all mean?

• The latest NAB business survey highlights the inherent level of caution that is being shown by corporate Australia. Rapid fire rate hikes and the devastating floods have robbed businesses of much needed optimism. In fact business confidence has now fallen to the weakest levels in just shy of two years. It’s important to highlight that the survey was conducted from January 10-14, and as such the effect of the floods on the latest reading is likely to be more profound.
• Interestingly a record 58 per cent of businesses surveyed confirmed that they are not looking for additional finance at this time. The November rate hike is having a lasting impact given the additional increase in borrowing costs. Clearly until activity levels improve and growth picks up pace, businesses are likely to sit on the sidelines.
• More concerning is the added weakness in forward looking indicators. Business owners continue to trim future orders, while profitability is still relatively weak. Given that retailers are aggressively discounting, borrowing costs are rising, and the higher Aussie dollar is curbing manufacturing exports, it is likely that activity will remain subdued in the near term. The negative momentum is clearly worrying, meaning that the Reserve Bank could face an extended stay on the interest rate sidelines.

• It is not all bad news, business conditions have shown signs of improving, rising for the last couple of months – albeit it from a very low base. No doubt the fact that interest rates have been on hold for a couple of months has been helping sentiment. The rebuilding phase following the floods should also provide a degree of  stimulus and improve business conditions.
• The latest reading on the manufacturing sector highlights the lacklustre activity levels in the domestic economy. The manufacturing sector has now contracted for five consecutive months and is holding just shy of the one year low reached last month. In fact the key sub indices of new orders and exports put into perspective just how tough times are for the sector. New orders continue to contract while the higher Australian dollar is making exports less competitive on the global stage and keeping selling prices depressed – a concerning sign given the forward looking aspect of these indicators.
• Interestingly inventory levels have been run down to the lowest levels in 20 months. It may be that the reduction in production has been caused by the floods, resulting in businesses running down inventories. And it just might be what the manufacturing sector needs. An inventory rebuilding phase would need to take place, replenishing stockpiles and supporting activity in coming months.

What do the figures show?

National Australia Bank Business Survey:

• The National Australia Bank business confidence index fell from +6.2.to -2.7 in December – marking the weakest reading in 20 months.

• The business conditions index rose for only the second time in ten months, rising from +3.7 to +5.8 in December.
• Excluding Queensland the confidence reading fell to +1.0, while conditions rose to +9.0.
• The index of trading conditions improved, up from +4.1 to +8.7; profitability recorded a marginal improvement from +1.6 to +2.6; employment rose from +4.4 to +5.1; and forward orders remained weak sliding from -2.0 to -2.6.
• The monthly reading of labour costs fell from 1.1 per cent to 0.8 per cent in December. NAB noted that annual growth of labour costs stands at 4.2 per cent.
• Inflationary pressures are well contained. Retail prices rose at a 0.4 per cent annual rate in December. Purchase costs jumped by a 0.5 per cent quarterly rate, however the annual rate of increase edged lower to 2.0 per cent.
• Capacity utilisation rose from 80.9 per cent to 82.3 per cent in December – above the decade average of 81.6 per cent.

Performance of Manufacturing Index

• The Performance of Manufacturing index rose modestly from 46.3 to 46.7 in January, marking the fifth straight month that the PMI has been below 50, indicating that the manufacturing sector is contracting.
• Key activity components of the PMI were mostly weaker in December. New Orders recorded a modest improvement (despite still contracting), while production moved back into expansion territory. Employment still contracted however at a more modest pace.
• The production sub index rose 3.7 points to 50.3; new orders rose by 0.8 points to 45.1; the employment index rose 4.9 points to 44.1; exports rose by 0.3 points to 48.9; the index of selling prices rose modestly from 48.2 to 50.7, while input prices rose by 7.5 points to 71.2 and wages eased marginally.
• In seasonally adjusted terms just three of the 12 sectors recorded a decline in activity in January.

What is the importance of the economic data?

• The monthly Performance of Manufacturing Index is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• Looking forward, business confidence and conditions should improve to a modest degree as long as the Reserve Bank remains on the interest rate sidelines.
• Given the sustained contraction in the manufacturing sector and weakness in other indicators such as housing activity and business confidence, the Reserve Bank would be hard pressed to justify a near term rate hike, especially considering the tame inflation environment.

The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399 a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia. This report is approved and distributed in the UK by Commonwealth Bank of Australia incorporated in Australia with limited liability. Registered in England No. BR250 and regulated in the UK by the Financial Services Authority (FSA). This report does not purport to be a complete statement or summary. For the purpose of the FSA rules, this report and related services are not intended for private customers and are not available to them.

Commonwealth Bank of Australia and its subsidiaries have effected or may effect transactions for their own account in any investments or related investments referred to in this report.

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• The broad measure of business inflation – the producer price index (PPI) – rose by just 0.1 per cent in the December quarter, well below expectations for an increase of 0.5 per cent. Compared with a year ago, producer prices were up by 2.7 per cent.
• Inflation was narrowly based, and largely driven by price increases for building materials and agricultural products like flowers and poultry. The rising Australian dollar resulted in prices of imported goods falling by 4.4 per cent in the December quarter to be 2.4 per cent lower over the year.
• Motorists need to prepare for higher petrol prices. The terminal gate or wholesale price of petrol leapt by almost 2 cents a litre last week to 26-month highs. CommSec expects petrol prices to rise 3 cents a litre over the coming fortnight.

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• The outlook for home builders is gloomy. Approvals to build news homes slumped by 4.2 per cent in November. The slide in approvals marked the seventh decline in eight months. Over the past eight months approvals have fallen by 23 per cent
• The all-important new house segement was down by 2.0 per cent and apartment approvals fell by 2.0 per cent.
• The value of building approvals fell by 3.5 per cent in November to be down 32.5 per cent in annual terms, largely driven by a weakness in commercial building.
• The value of alterations and additions rose to record highs in trend terms as a growing number of people elect to renovate rather than move.
• The services sector is still going backwards. The Performance of Services index rose modestly from 46.2 to 46.4 in December. Any reading below 50 suggests that the services sector is contracting. The services sector contacted for ten months in 2010.

What does it all mean?

• The latest slide in building approvals rings true with the anecdotal evidence that we have been hearing for some time. Not only are approvals below longer-term averages but they have fallen for seven out of the past eight months. And the downturn is not just limited to home building with the value of commercial construction loans sliding by just shy of 60 per cent on a year ago. All areas of the construction sector would be rightly worried about the outlook.
• The rate hikes have certainly taken their toll on the housing sector over the past year and unfortunately for the sector it is unlikely that a turnaround is going to take place anytime soon – especially given the double whammy rate hike in November is yet to make its mark on the data.
• While approvals to build new homes may be sliding one area that has picked up pace is the renovation market. In smoothed terms the value of alterations and additions rose to a record high of almost $560 million in November. Whether it is higher home prices or the cost of building or development that is driving the increase, people seem to be electing to renovate rather than move.

• Interestingly when you look across the states Victoria continues to outshine the rest. In annual terms approvals in Victoria are still up 4 per cent on a year ago, compared with the likes of NSW, Queensland, South Australia and Tasmania which have recorded double digit losses. The strength in construction activity in Victoria has provided a healthy degree of support for the state economy over the past year.
• While interest rate rises have been the driver for the weaker activity levels, state, federal and local governments need to share part of the blame. In states like NSW, costs for developers need to be reassessed,
  as a degree of under building continues to take place. The sustained slide in rental vacancy rates is a clear indicator of the level of under building.
• The data yesterday highlighted the contraction in the manufacturing sector and the story is no different for the service sector. There are a couple of factors driving the weakness in the services sector including higher interest rates, a stronger currency and the conservative buying behaviour of consumers and businesses.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Input costs and wages remain elevated but selling prices are flat. Business margins are constrained, thus depressing profitability.
• A period of interest rate stability would clearly help the situation. If the Reserve Bank stayed on the interest rate sidelines over the next couple of months, activity levels should improve.

What do the figures show?

Building Approvals:

• New dwelling approvals slumped by 4.2 per cent in November, after rising by 8.3 per cent in October. Dwelling approvals have fallen for seven out of the last eight months and are down 9.9 per cent on levels of a year ago.
• House approvals fell by 2.0 per cent in November (private sector down 1.7 per cent), after rising by 1.2 per cent in October. Apartment approvals fell by 7.7 per cent in November (private sector was down 5.5 per cent) after rising by 22.3 per cent in October. In annual terms apartment approvals are up 3.8 per cent on a year ago.
• Dwelling approvals fell most in Tasmania (down 15.4 per cent) and NSW (down 13.4 per cent) in November. Approvals improved the most in Western Australia (up 7.1 per cent).
• In annual terms approvals across the state: NSW (down 19.4 per cent), Victoria (up 4.9 per cent), Queensland (down 24.6 per cent), South Australia (down 11.6 per cent), Western Australia (down 4.9 per cent),
• The value of building approvals fell by 3.5 per cent in November and was lower by 32.5 per cent on a year ago.

Performance of Services index

• The Performance of Services index rose modestly from 46.2 to 46.4 in December. It was the tenth time in the past 12 months that the PSI has been below 50. Any reading below 50 indicates a contraction of activity.
• The poor performance in services sector activity was largely concentrated in the professional services subsectors. In particular, the activity indices of the property & business services, finance & insurance, and communication services sub-sectors all fell sharply in December.
• On the other hand, the activity indices of the services sub-sectors exposed to household spending generally picked up in the month, after falling back in November. The strongest growth was recorded in the wholesale trade, hospitality and personal & recreational services.
• Sales, orders and employment all recorded modest improvement but still remained below 50, suggesting weak activity levels in coming months. In fact only input prices and wages have index readings above 50
• Profitability is clearly under pressure with the index of selling prices largely unchanged while input prices and wages continue to trend higher.

What is the importance of the economic data?

• 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 Australian Industry Group and Commonwealth Bank release the Performance of Services index each month. The PSI is a key indicator of conditions in the services sector – includes retailing, finance, hotels and cafes.

What are the implications for interest rates and investors?

• It is important to highlight that while the housing sector is cooling it is not about to collapse in a heap. The fundamental for property remain attractive. Population growth remains healthy, vacancy rates continue to slide and the employment growth will support activity in the mid to longer term.
• Overall CommSec expects house prices to consolidate over the next few months, but for the year as a whole we would expect prices to lift by 5-8 per cent.

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• The national average terminal gate or wholesale price of petrol currently stands at a 26-month high of 124.2 cents a litre.
• Fortunately for motorists, increased competition has seen oil companies holding back on passing on the added increase over the holiday period. In fact pump prices have actually fallen over the past week due to a breakdown in the discounting cycle.
• The Performance of Manufacturing index eased from 47.6 to 46.3 in December – a 1 year low. Any reading above 50 means the manufacturing sector is expanding. Key sub-indexes were mostly weak with new orders, production and exports still contracting.

What does it all mean?

• Usually at this time of the year there is a tendency to blame the oil companies for a hike in petrol prices however this time round it certainly isn’t the case and motorists are the clear winners. So far prices at the petrol pump have nowhere near matched the lift in the wholesale (terminal gate prices). In fact despite the global oil price tracking higher and the wholesale petrol prices at 26-month highs, the pump price seems to have fallen in the past week and it is largely due to a breakdown in the discounting cycle.
• Over the past week, the breakdown of the discounting cycle has resulted in retailers selling fuel in some states at or near cost. The wholesale (terminal gate) price has held at around $1.24 a litre, while capital cities like Sydney, Melbourne, Brisbane and Adelaide had a fuel price of around $1.24-$1.26 a litre. Interestingly the breakdown in the discounting cycle comes at a time when wholesale prices are rising – clearly an unsustainable scenario in the longer term and motorists should enjoy it while they can.
• The renewed optimism in the global economy recovery has resulted in a sharp rise in the Singapore unleaded price in recent times. However the strength of the Australian dollar has also played a significant part in curbing some of the price impact from the strength in the global oil price. In fact had the Australian dollar remained held at the 84 cents against the US dollar that it was trading at six months ago, motorists would be paying an addition 25- 30 cents a litre for fuel.
• The sustained slide in the manufacturing gauge clearly highlights the lacklustre activity levels in the domestic economy. The manufacturing sector has now contracted for four consecutive months and is holding at one year lows. In fact the key sub indices of production, new orders and exports personify just how tough times are for the sector – with all three sub indices still showing a contraction. And given the forward looking aspect of these indicators it is unlikely that the manufacturing sector will record any significant improvement anytime soon.
• The strength of the Australian dollar has had a profound impact on the manufacturing sector, making exports less competitive and keeping selling prices depressed. There is a lot of data out over the next couple of weeks however given the sustained contraction in the manufacturing sector and weakness in other indicators such as housing activity and consumer spending, the Reserve Bank would be hard pressed to justify a near term rate hike, especially given the tame inflation environment.

What do the figures show?

Petrol prices:

• The national average wholesale (terminal gate) price hit a 26-month low high of 124.2 cents a litre on December 31st. And is currently holding at those levels – up a further 0.6 cents over the week. Just over two months ago (October 1) the terminal gate price stood at an 11-month low of 111.6c/l.
• Last week, the key Singapore unleaded petrol price fell by US$1.63 (1.6 per cent) to US$103.17 a barrel. And in Australian dollar terms the Singapore gasoline price fell by $1.39 (1.3 per cent) over the week to $103.01 a barrel.
• The Performance of Manufacturing index fell from 47.6 to 46.3 in December, marking the fourth straight month that the PMI has been below 50, indicating that the manufacturing sector is contracting.
• Key activity components of the PMI were mostly weaker in December. New Orders recorded a modest improvement (despite still contracting), while production and employment contracted at a faster rate.
• The production sub index fell 2.4 points to 46.6; new orders rose by 1.0 point to 44.1; the employment index eased 1.8 points to 44.1; exports rose by 2.2 points to 48.6; the index of selling prices rose modestly to 48.2 while input prices and wages also rose.
• In seasonally adjusted terms nine of the 12 sectors recorded a decline in activity in December.

What is the importance of the economic data?

• Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum. National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions.
• The monthly Performance of Manufacturing Index is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.

What are the implications for interest rates and investors?

• The breakdown of the discounting cycle is great news for motorists, boosting spending power as well as consumer sentiment levels. Margin pressure may have a more detrimental impact on independent petrol station operators.

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