• Employment fell by 10,100 people in February – the biggest decline in 18 months (since August 2009). Economists had tipped job gains of 20,000 (range from -10,000 to +35,000 jobs). The January result was revised sharply lower to show growth of 7,700 people (previously +24,000). Full-time employment rose by 47,600 in February (January jobs were down by 12,300) and part-time jobs fell by 57,700 (January jobs rose by 20,000).
• The unemployment rate was unchanged at 5.0 per cent. The participation rate fell from a downwardlyrevised 65.8 per cent to 65.7 per cent. The working age population rose by 19,200.
• Average hours worked rose by 1.1 per cent in February after falling by 0.8 per cent in January.
• Across the states and territories unemployment rates in February were: NSW 4.8 per cent (4.9 per cent in January); Victoria 5.0 per cent (5.1 per cent); Queensland 5.6 per cent (5.6 per cent); South Australia 5.8 per cent (5.4 per cent); Western Australia 4.2 per cent (4.6 per cent); Tasmania 5.6 per cent (6.4 per cent); Northern Territory 2.3 per cent (2.4 per cent); ACT 3.5 per cent (3.4 per cent).
• Employment rose most in NSW (up 22,400) followed by South Australia and Northern Territory (up 400). Jobs fell most in Queensland (down 22,100) followed by Western Australia (down 10,600), Tasmania (down 500) and Victoria and the ACT (both down 200).

What does it all mean?

• There are clear signs that the Aussie economy is losing momentum. Jobs are now falling, adding to data showing stagnant retail spending, weak housing market and contracting activity in manufacturing, services and construction sectors. Over the last three months employment has fallen by 2,300 people and this highlights that the recent weakness is not an aberration. In fact employment started to slow before the floods and cyclone hit.
• The rapid fire rate hikes and sluggish consumer activity is starting to show cracks in the labour market data. More and more businesses are telling us that conditions are tougher now than at the height of the global financial crisis and earlier this week the NAB business survey highlighted the weakness in business trading conditions. Profitability is being squeezed, the employment index remains weak and forward orders are being pared back – all a clear sign that businesses are finding times tough.

• The Reserve Bank had warned that the job market would slow, and clearly it got that one right. The central bank has also been anticipating a softening of conditions in the labour market going forward – in line with the weak growth forecasts for the first half of 2011. In fact the Reserve Bank expects the unemployment rate to only slide by 0.5 per cent over the coming two years. No doubt in the longer term an improvement in productivity and a pickup in skilled migration is what is needed to ensure that these forecasts are met. The jobs data gives the Reserve Bank further reason to stay on the interest rate sidelines.
• Not only did employment fall in the latest month but the January result was sharply downgraded. While the good news is that full-time jobs in the month, it is important that the figures are not taken too literally. It is hard to believe that full-time jobs would soar almost 48,000 just as part-time jobs were falling by almost 58,000. The volatility over the last few months means that trend estimates are probably more accurate and these show a slowdown in job creation.
• Again it’s hard to believe that Western Australian jobs would fall at the same time the unemployment rate was easing. Or that unemployment in Tasmania could fall from 6.4 per cent to 5.6 per cent in the space of a month.
• It is important to highlight that the data is backward looking, capturing how the economy was tracking around 4-5 months ago. And even more forward looking indicators like the job ads series suggest that while employment growth will remain a feature it is likely to be a less robust in the near term.
• Overall it is unlikely that the Reserve Bank will be pursuing further interest rate rises anytime soon. While CommSec had expected the next rate hike to take place in May, there is clearly an array of risks to our call. And if activity levels remain subdued over the next couple of months it is possible the anticipated May rate hike could be pushed out by a number of months.

What do the figures show?

Labour force

• Employment fell for the first time in 18 months in February, falling by 10,100 workers. Full-time employment rose by 47,000 after falling by 12,300 in January. Part-time employment fell by 57,800 after rising by 20,000 in January.
• The annual employment growth rate eased from 3.3 per cent to 3.0 per cent.
• The unemployment rate remained steady at 5.0 per cent. The participation rate eased from 65.8 per cent to 65.7 per cent.
• Average hours worked rose by 1.1 per cent in February after falling by 0.8 per cent in January. Over the year average hours worked rose by 2.3 per cent.
• NSW (up 22,400) led the job gains in February, followed by South Australia and Northern Territory (up 400). Jobs fell most in Queensland (down 22,100) followed by Western Australia (down 10,600), Tasmania (down 500) and Victoria and the ACT (both down 200).
• Across the states and territories unemployment rates in February were: NSW 4.8 per cent (4.9 per cent in January); Victoria 5.0 per cent (5.1 per cent); Queensland 5.6 per cent (5.6 per cent); South Australia 5.8 per cent (5.4 per cent); Western Australia 4.2 per cent (4.6 per cent); Tasmania 5.6 per cent (6.4 per cent); Northern Territory 2.3 per cent (2.4 per cent); ACT 3.5 per cent (3.4 per cent).
• The working age population rose by 19,200 in February after lifting by 19,000 in January. The working age population grew by 1.80 per cent over the past year – the smallest gain in 50 months.

What is the importance of the economic data?

• The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.
• If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.

What are the implications for interest rates and investors?

• CommSec expects the jobless rate to ease to around 4.5 per cent over the coming year. But if the Federal Government was to provide a much needed boost to labour supply by lifting the migrant intake and easing work visa restrictions, the job market may not need to tighten as much as expected.
• We expect the job market to remain relatively healthy particularly in the second half of the year. However the job market may trend sideways for the next couple of months. Our equity media analysts maintain their hold rating on SEEK Limited
• We are hearing that global fund managers are looking to exit positions in Australia, concerned by our softer economy and uncertainty about proposed taxes on carbon and the resources sector. The high Australian dollar and softening in the job market are yet further reasons for investors to be looking at economies in the upswing phase with the key candidate being the United States. While we are not revising down our sharemarket forecasts, they are under review.

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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.

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• The Government’s commodity forecaster has lifted its crop forecasts. ABARES has lifted its forecast for the 2010/11 winter crop by 6.2 per cent. Despite dry conditions in the west and floods in the east, ABARES tips a record wheat crop with production up 22 per cent on a year ago.
• Construction is contracting, joining the services and manufacturing sectors. All the key sectors in the economy are estimated to be going backwards at present. The Performance of Construction index fell by 1.8 points to 42.2 in November, below the 50 reading that separates expansion from contraction.

What does it all mean?

• Despite the over-abundance of rain in recent weeks, the Government’s chief commodity forecaster still believes that Australia will produce a record wheat crop this year. Unfortunately quality will be downgraded, affecting returns to farmers, but in a macro perspective the bumper crop is positive for rural Australia. The key issue for many farmers over the next few weeks, however, is for conditions to become dry enough to get the crop off.
• As always, conditions are far from uniform. Grain producers in the east are benefiting from the rain, but in the west the lack of rain means that the harvest could be half that of a year ago.
• Certainly the outlook for the summer crop is decidedly positive with cotton and rice farmers to be amongst the key beneficiaries of the big wet.
• Overall there will be more money in the rural economy over the coming year, courtesy of the breaking of the drought. Drought in the west and floods in the east mean that not all will share the gains. But in aggregate, income levels will be higher, boosting the outlook for retail, manufacturing and services businesses in regional centres.
• The construction sector is facing challenging conditions and all areas of government are seemingly showing no interest in addressing fundamental issues. Planning, zoning, regulation and costs are all key issues for builders and construction companies at present and serving as road blocks to higher activity levels. The Performance of Construction sector has only produced a handful of positive readings over the past two years and conditions are getting worse, not better.

What do the figures show?

ABARES Crop Report:

• The Australian Government’s commodity forecaster, ABARES, has lifted its forecast for 2010/11 winter crop production by 6.2 per cent to 43.1 million tonnes (Mt). The crop is now seen 21.7 per cent higher than 2009/10. Downgrades were applied to Queensland and Western Australian production and upgrades to other states.
• ABARES has also lifted its forecast for summer crop production by 21.6 per cent to 4.6Mt. Production of the summer crop in 2010/11 is expected to be the highest in nine years. Cotton production is tipped to soar by 130 per cent with rice production almost four times higher than the previous year at 802Kt.
• ABARES expects that wheat production will hit a record high of 26.8Mt in 2010/11, up 22.4 per cent on the previous year. Barley production is estimated to rise by 24.1 per cent to 9.8 million tonnes and canola production is estimated at 2.0 million tonnes, 6.6 per cent higher than last year.
• Exports of coarse grains in 2010/11 are tipped to rise by 23 per cent to 6.5Mt with wheat exports tipped to rise 8.5 per cent to 16Mt.

Performance of Construction index:

• The Performance of Construction index fell by 1.8 points to 42.2 in November. Any reading below 50 indicates that the sector is going backwards.
• All key sectors had activity readings below 50 with apartments at the lowest levels in 16 months. Only engineering improved in November but the reading of 39.4 was still well below the 50 line.
• Profitability is under significant pressure with selling prices sliding 11.7 points to 43.4 and input prices down only 0.9 points to 75.4.

What is the importance of the economic data?

• ABARE releases its Crop Report four times a year. The report contains the latest estimates of crop conditions, yields as well as expected exports. The information is useful in gauging the health of the rural sector.
• The Performance of Construction index is released monthly and provides a guide to operating conditions across the sector including residential, commercial and engineering construction.

What are the implications for interest rates and investors?

• The Reserve Bank has plenty to digest at present – droughts, floods, a mining boom and the conservative mindset of consumers and businesses. Now is certainly the time for interest rate stability.
• Our CBA equity analysts indicate that main beneficiary of the excess rainfall is Ridley Corporation (RIC), “which will now have an abundant supply of feed quality grain for milling yet global grain prices remain strong so RIC’s milling margins do not appear under pressure”. Ridley Corp is the preferred stock of CBA Equity Research in the Food & Agribusiness sector.
• Of other stocks in the sector the analysts note:
  • “GrainCorp (GNC) now appears likely to have FY11 grain receivals around the lower end of guidance (10- 13Mt).
  • PrimeAg (PAG) may be affected by flooding in the Emerald region but has good conditions for its cotton crop.
  • Goodman Fielder (GFF) has started buying its milling wheat (for flour milling by Allied Mills) for the second half of 2011 and the 2012 financial year and will face materially higher input costs as the spread between milling wheat and feed quality wheat widens.”

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And, very often, these principals operate in relative isolation to their profession. Outside of PD days and industry conferences, they generally have few opportunities to come together to learn from others who are running businesses similar to theirs – to share experiences and discuss pertinent issues with their peers and colleagues.

Consequently, it is difficult for most to know what is loosely termed (and for want of a better description) “best practice”. For example, in a business similar to mine:-

• What is the standard ratio of support staff to advisers?
• What is the average level of practice profitability?
• Is my practice performing better or worse than others in terms of growth/attrition rates over the past 12 months?
• How does my client satisfaction level compare to my peers, not only from within my own dealer but also to “external” firms?
• How often should staff meetings be held?

And so it goes on.

But as agents Mulder and Scully reminded us each week in the X Files – the truth is out there. It’s only a matter of taking time and making the effort to find out. So why don’t more seek out the truth and benchmark their practice?

Stats & Facts

• Those practices which proactively seek regular feedback from their clients in a structured manner are achieving a 74% uplift in profit (compared to those which don’t).
• Practices utilizing an external business adviser are achieving a 94% uplift in profit.

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