February’s modest lift in retail trade was below market expectations which were centred on a rise of 0.3% (CBA (f) 0.5%).  The relatively soft outcome was a result of statistical payback following the big jump in sales over January.  The overall trend in retail trade is an upbeat story.  Retail trade growth has been on a strong uptrend since August last year.  Monetary policy stimulus is working and the growth transition is underway.

The detail in today’s data reveals are more positive story, notwithstanding the soft headline result.  The 0.2% lift in sales over the month was driven by an increase of 0.5% in discretionary spending.  Spending on non‑discretionary items fell over the month.  Spending growth was strongest on household goods, rising by 2.0%.  The substantial lift in residential construction that will occur over 2014 will support spending on household goods.  We expect this component of retail trade to record strong growth outcomes over the year.

Across the other categories, there were increases in other* (+1.9%), clothing, footwear and personal accessories (+0.1%), and cafes and restaurants (+0.1%).  Spending at cafes and restaurants has been the strongest component of retail trade over the past year.  Annual growth is up a whopping 10.3% over the year.  An indication that consumer caution has receded.  Falls were recorded in food retailing (‑0.2%) and department store spending (‑4.7%).

For the States, retail trade growth was strongest in Vic (+0.5%).  This was followed by WA (+0.4%), Qld (+0.1%), and NSW (+0.1%).  Sales were flat in SA and fell in ACT (‑0.1%), NT (‑0.6%) and Tas (‑1.4%).  On an annual basis, retail trade growth has been strongest in Australia’s two largest States, NSW and Victoria.  This has been in line with the largest house price appreciation in Sydney and Melbourne and is indicative of the correlation between house price growth and consumer spending (see chart over the page).  Also consistent with the growth transition from mining to non‑mining States.  Retail trade growth in WA has been relatively soft over the past year and we suspect that some of the softness can be attributed to discounting on services as mining construction slows.

From a policy perspective, today’s figures confirm that the underlying trend in retail trade remains intact and that the monetary policy transmission mechanism is working.  Interest rate cuts have played a major role in lifting dwelling prices which has strengthened household balance sheets.  This in turns supports consumer confidence which spills over to an increase in consumer spending.

The most recent Australian GDP figures showed that the household savings ratio fell over QIV, albeit from a high level.  So it looks like low interest rates are also playing a role in slowly shifting the preferences of households from high levels of saving and spending restraint to increased consumption.

In summary, a soft headline result, but a reasonable set of numbers in the context of a sustained pick‑up in consumer spending over an extended period.  Consumer spending looks set to make a solid contribution to QI GDP growth.

*other retailing includes newspaper and book retailing, recreational goods retailing and pharmaceutical, and cosmetic and toiletry goods retailing.

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State & territory economic performance report

• How are Australia’s states and territories performing? Each quarter CommSec attempts to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the “normal” performance.
• Western Australia remains the top-performing economy in the nation with no slippage in the ranking over the past three months. The ACT has maintained its position as the second-best performing economy. But the big changes have been below with now little to separate Northern Territory, Queensland, NSW and Victoria, although in that order. There is then a gap to South Australia and another gap to Tasmania with both states clearly under-performing other economies at present.
• Western Australia comes out on top now on only one of the eight criteria – retail spending.  Western Australia is still second on five of the eight indicators, third on unemployment and fourth on dwelling starts.
• The jump in the rankings of Queensland to equal fourth is due to improvements in business investment, unemployment, housing finance and dwelling starts. The Northern Territory has lost ground in dwelling starts, population growth and business investment.

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Retail spending 2012

Over 2012 as a whole, Australians spent $256.1 billion at retail outlets. Spending was up 3.1 per cent over 2011 – the strongest calendar-year growth in three years.

The 3.1 per cent growth in spending was below the decade-average (“normal”) growth rate of 5.0 per cent. But the weaker-than-normal growth was due to low prices, rather than weak spending. In real (inflation-adjusted) terms, retail trade grew by 3.2 per cent in 2012 – the strongest calendar year growth in five years.

 
What does it all mean?

• Economists are fond of looking at monthly or quarterly statistical data. But sometimes it pays to step back and looking at longer-term trends. And that longer-term perspective pays off when it comes to retail spending. Over the past three months retail trade fell – the first time it has fallen for three straight months in 13 years. But spending was actually quite firm in the early and middle part of the year. For the year as a whole, retail trade rose by 3.1 per cent – the strongest growth in three years. And if inflation is stripped out, spending grew by 3.2 per cent – the strongest growth in five years.
• The bottom-line is that 2012 wasn’t a bad year at all in terms of retail spending. That doesn’t mean that it wasn’t tough for retailers. Retailers were forced to trim margins and cut prices to move stock. But generally it worked; growth in spending was faster than the average growth pace recorded over the past five years.
• In fact department store sales grew by 1.9 per cent in real terms in 2012 – that is, there was a 1.9 per cent lift in the number of goods that were purchased over the year. That was actually the strongest calendar-year performance in five years – the strongest since spending rose by 4.7 per cent in the 2007 year.
• Supermarkets also recorded the best real growth in spending in eight years – growth of 4.3 per cent in 2012 was the strongest since 2004. Specialised food outlets like butchers and fruit & vegetable shops recorded the strongest calendar year growth in five years (5.3 per cent real growth). Electrical good retailers had the best year in four years (6.2 per cent growth). And pharmacies recorded the strongest growth in three years (10.3 per cent).
• It is also important to note that Aussie consumers have been spending in different ways. Aussies have been taking holidays overseas in record numbers and a record number of cars were purchased in 2012 as well. Broader consumer spending grew by 3.3 per cent in the year to September (December quarter figures aren’t available yet) – above the 2.8 per cent average growth over the past five years and broadly in line with the decade average growth rate of 3.4 per cent.
• The interesting point is that retail spending seems to have softened since the Reserve Bank started cutting rates in mid 2012, not accelerated. Given that there are more term and “other” deposits in the economy than owner-occupier home loans, the people that rely on interest income may have curtailed their spending to a greater extent in response to rate cuts than home buyers have lifted spending.

What are the implications for interest rates and investors?

• Consumers don’t spend evenly over the year. If there are government hand-outs, major discounts, price wars or periods of more buoyant consumer sentiment sparked by firmer share or home prices, then consumers will spend. But once the purchases are made, then Aussie consumers may retreat to the sidelines for a while.
• We’ll have to wait and see what the January spending results show, but the anecdotes suggest that consumers came out of their bunkers to spend in the post-Christmas sales after a quiet spending period from October to December.
• But on balance, 2012 could hardly be described as a weak year for consumer spending. Retailers may have had to keep a lid on prices, but Aussie consumers did respond by buying more over 2012.
• Few are suggesting that retailers will be able to let up on their discounting activity any time soon, but a lot will depend on how consumer confidence tracks in coming months. Retailers will have to keep a lid on costs, improve marketing and customer service, and maintain competitive pricing to keep stock turning over.

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• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 0.5 cents per litre to 143.2 cents a litre in the week to March 20 – a near 29 month high.
• Over the past five weeks the national average price has lifted by 8.4 cents per litre – marking the biggest five weekly gain in two years. Given rises in regional prices there is still risk of a modest lift to petrol prices in the coming fortnight
• In seasonally adjusted terms imports rose by 6 per cent in February. The rise in imports was largely due to the sharp increase in global oil prices. The fuels and lubricants component rose $561m (26 per cent) in February. CommSec expects a trade suplus of $1.5 billion for February.
• The average household is now forking out $200 a month to fill the car up with petrol – an increase of $25 in just the last four months.
• Across capital cities Canberra motorists are paying the highest price for petrol at almost a $1.49 a litre. In contrast Adelaide has the cheapest prices by a huge margin with the average price at $1.35 a litre.

What does it all mean?

• The cost of petrol continues to be the topic of conversation around the water cooler and it is not surprising given that the national average petrol prices has surged by almost 13 cents a litre in the space of 10 weeks and is now holding at fresh 29-month highs. In fact since mid January the weekly national price has only fallen in just once.
• The political instability in the Middle East and North Africa is the key driver of near term prices. And given the military strikes on Libya over the weekend, and escalating unrest in the region, the global oil price is likely to remain volatile – and as such have a further bearing on domestic pump prices.
• Interestingly the debate about oil companies taking advantage of the current turmoil, and lifting petrol prices well above the norm, can be put to rest. Over the past five weeks the wholesale (terminal gate) price has risen by nine cents a litre, while the retail pump prices has risen by a similar 8.4 cents a litre, suggesting that the hike in retail prices is in line with what is taking place on a global front.
• Most of the gains in the wholesale price have filtered through to domestic petrol prices, however looking forward, it is unlikely that motorists are likely to get a reprieve in coming weeks. Over the past week the Singapore unleaded price has jumped by a further $2 a barrel (exacerbated by the weakness in the Australian dollar) and this will be reflected on petrol signboards around the country.

• CommSec expects pump prices to increase by a further 2 cents a litre in the next fortnight, taking the national average price to around $1.45 a litre.

What do the figures show?

Petrol prices:

• According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 0.5 cents a litre to 143.2 cents a litre in the week to March 20. The metropolitan price rose by 0.1 c/l to 142.9 c/l, while the regional average price rose by 1.2 c/l to 143.8 c/l.
• Average petrol prices across states over the past week were: Sydney (up 0.3 cents to 143.5 c/l), Melbourne (up 0.2 cents to 142.4 c/l), Brisbane (up 0.3 cents to 145.9 c/l), Adelaide (down 6.1 cents to 135.0 c/l), Perth (up 1.5 cents to 143.0 c/l), Darwin (up 1.9 cents to 146.3 c/l), Canberra (up 11.3 cents to 148.6 c/l) and Hobart (up 0.6 cents to 146.1 c/l)
• The national average wholesale (terminal gate) hit a fresh 29-month high of 135.4 cents a litre on March 15, having since eased by 1.1 cents a litre to 134.3 cents today.
• Last week, the key Singapore unleaded petrol price rose by US$1.08 (0.9 per cent) to US$121.90 a barrel. And in Australian dollar terms the Singapore gasoline price rose by $2.23 (1.9 per cent) over the week to $122.70 a barrel.

Merchandise imports

• Imports rose by 6 per cent in seasonally adjusted terms in February according to the Australian Bureau of Statistics. Intermediate goods rose by 12 per cent while capital goods rose by 2 per cent.

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 ABS figures on imports refer to physical goods such as cars and computers. The figures are not adjusted for seasonal effects. The data is useful in highlighting the strength of consumer and business spending and gives some guidance as to the likely trade position in the month. But analysis can be clouded by currency changes.

What are the implications for interest rates and investors?

• The lift in the price of petrol is further bad news for motorists, taking precious spending dollars out of consumer pockets. Retailers already have to contend with the effects of the weather on seasonal spending, consumer conservatism and higher utility prices.
• The rising fuel prices are likely to entrench the current conservative behaviour of consumers. Our equity analysts are maintaining HOLD recommendations for both Woolworths and Wesfarmers.

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• In line with anecdotal evidence, consumer spending strengthened in February. The Commonwealth Bank Business Sales Indicator (BSI) rose by 0.5 per cent in trend terms in February, ahead of a slightly smaller gain in January and the strongest result in 18 months. Of further encouragement only two of the 20 industry sectors recorded weaker sales in February, down from three sectors in January and four sectors in December.
• In seasonally adjusted terms the BSI rose by 0.4 per cent in February – the third gain in four months.
• The Commonwealth BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities.
• The BSI covers spending broadly across the economy rather than just retail sales, including spending on automobiles, personal services and airlines. The BSI had consistently underperformed against the Australian Bureau of Statistics retail trade series over the past year but the period of under-performance appears to have come to an end.

What does it all mean?

• The Commonwealth Bank Business Sales Indicator (BSI) rose by 0.5 per cent in trend terms in February after a gain of just under 0.5 per cent January. The BSI is now recording the strongest monthly growth in 18 months.
• The BSI had consistently under-performed against the Australian Bureau of Statistics retail trade series over the past year but the period of under-performance appeared to have come to an end. The earlier tentative signs of improvement in spending are now being translated into firmer readings for the trend series.
• The trend estimates are constantly revised with the addition of new data. And it is clear that the tentative signs of improvement in spending identified in recent months are now being translated into firmer readings for the trend series. Previously, spending was shown to have declined by 0.2 per cent in trend terms in January, but the revised figures are now showing growth of almost 0.5 per cent.
• In recent months, a key source of encouragement had been the fact that the majority of industry sectors were recording spending growth in trend terms. There was similar encouragement in the February data with only two of the 20 sectors reporting weaker spending in trend terms, down from three in January and four sectors in December.

What do the figures show?

• The Commonwealth Bank Business Sales Indicator (BSI) rose by 0.5 per cent in trend terms in February after a gain of just under 0.5 per cent January. The BSI is now recording the strongest monthly growth in 18 months.
• The trend estimates are constantly revised with the addition of new data. And it is clear that the tentative signs of improvement in spending identified in recent months are now being translated into firmer readings for the trend series. Previously, spending was shown to have declined by 0.2 per cent in trend terms in January, but the revised figures are now showing growth of almost 0.5 per cent.
• The Commonwealth BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities. And in line with the practice of the Bureau of Statistics with its retail trade data, seasonally adjusted and trend estimates of the BSI are obtained by applying statistical software. This allows analysis of the broader underlying trends that may be hidden in the raw data.
• In seasonally adjusted terms the BSI rose by 0.4 per cent in February after an upwardly revised increase of 2.4 per cent in January.
• In recent months, a key source of encouragement had been the fact that the majority of industry sectors were recording spending growth in trend terms. There was similar encouragement in the February data with only two of the 20 sectors reporting weaker spending in trend terms, down from three in January and four sectors in December. And the biggest industry category – retail stores – rose by 0.9 per cent in February, the sixth straight gain.

• Across the industry groups, the only sectors to record weaker spending in trend terms were Automobiles &  Vehicles (includes services stations as well as car and boat dealers, tyre and auto parts stores) with sales down 0.1 per cent, and Mail order & telephone order providers (down 0.9 per cent).
• The strongest lift in spending in trend terms was by Repair services (up 2.2 per cent) followed by Amusement & entertainment (includes motion picture theatres, bowling alleys, golf courses and video stores), up 1.6 per cent. Encouragingly, the Business services sector has recorded consistent growth for the past 13 months.
• In annual terms, just five of the 20 industry sectors contracted in February, down from seven sectors in January. The weakest sector was Mail Order and Telephone Order Providers (down 15.7 per cent on a year earlier), followed by Automobile & vehicles (down by 10.6 per cent) and Miscellaneous stores (down 8.1 per cent).
• At the other end of the scale, spending at Contracted services (includes building trades such as electricians as well as veterinary services) was strongest, up 9.3 per cent, followed by Professional services & membership organisations, up by 8.6 per cent.
• None of the states and territories recorded weaker sales in trend terms in February. The weakest result was in Queensland (flat) while Victoria was strongest with a 0.7 per cent rise. Of the other states and territories, next strongest were South Australia and Tasmania (both up 0.6 per cent), followed by ACT and NSW (both up 0.4 per cent), Western Australia (up 0.2 per cent) and Northern Territory (up 0.1 per cent)
• In annual terms, the only state/territory to record growth in February was NSW (up 2.5 per cent). At the other end of the scale, the spending gauge was weakest in South Australia (down 7.2 per cent), Northern Territory (down 7.1 per cent) and Queensland (down 7.0 per cent).

What is the importance of the economic data?

• The Commonwealth Bank Business Sales Indicator is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities throughout Australia. Credit and debit card transactions can be volatile on a month-to-month basis, affected by seasonal and irregular factors. To better gauge the direction and changes of spending across the economy, the Business Sales Indicator is tracked in trend terms.
• The monthly Business Sales Indicator has been devised to provide a more timely assessment of spending trends in the economy. The main monthly indicator of spending in the economy is the Australian Bureau of Statistics’ (ABS) Retail Trade release. However these statistics cover just spending at retail establishments, and exclude spending at a raft of other businesses.

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• 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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• 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 big picture

• One of the biggest issues at present is the conservatism of Aussie consumers. Australians are saving again, rather than spending. And rather than buying goods on credit we are paying for goods with our own money – cash or EFTPOS.
• The changes in the behaviour of Australian consumers actually started back in 2003 with people actively winding back the outstanding balance on credit cards. And the second phase began just before the global financial crisis in mid 2007.
• The simple reason why consumers trimmed debt from 2003 was higher interest rates. In October 2003 the standard variable housing rate stood at 6.55 per cent but by mid 2008 home loan rates soared to 9.60 per cent. And while rates fell sharply as the global financial crisis took hold, it was the shock of GFC that consumers responded to rather than the attraction of lower rates.
• By April 2009, the average credit card balance was actually lower than a year earlier. In May 2002, credit card balances were expanding at a 23 per cent annual rate but in April 2009 the average credit card balance was 0.6 per cent lower than a year ago.
• Not only have consumers been cutting back on debt for some time, they have also been spending less and saving more. Over the past 25-years, retail spending has grown at a real annual rate of 4.0 per cent. Over the past five years this growth rate has slowed to just 3.0 per cent. And over the past three years, retail spending has grown at a real annual rate of just over 2.0 per cent.
• Some economists believe that consumers will quickly come to their senses in coming months that conditions are not so bad – the job market is healthy, wealth is at record highs – and so they will start spending and borrowing with gusto. But changes in consumer behaviour don’t happen overnight. The shift from spending to saving evolved over time as did the change attitude towards credit card debt.
• Reserve Bank officials don’t know how long this ‘new conservatism’ will last. In fact no one does. But the longer that consumers actively shop around for the best deals and focus more on saving, than spending, the longer the Reserve Bank can stay on the interest rate sidelines.
• Asset prices will be an important part of the equation. If the sharemarket or home prices suddenly decided to take off then the risk is that the exuberance could spill over to consumer spending.

The week ahead

• In the coming week, more pieces of the domestic ‘economic growth’ puzzle will fall into place. That is, more of the components of the December quarter GDP or economic growth figures will be released. The GDP result is not due until March 2. And in the US, the housing market will be in focus over the week.
• The coming week gets off to a reasonably slow start with no major economic data or events scheduled for Monday or Tuesday. But on Wednesday the Reserve Bank Governor delivers his first speech of 2011 while data on wages and construction activity is released at the same time.
• Governor Stevens will be speaking at a conference “Australia and the Resources Boom”. At present analysts think the Reserve Bank is unlikely to lift rates for some time, but if Stevens delivers a ‘hawkish’ address about the inflationary dangers of high income inflows then rate views may quickly change.
• The wage price index should confirm that wage pressures remain contained outside the mining sector. Overall we expect that wages lifted by 0.9 per cent in the December quarter to stand 3.8 per cent over the year.
• There is a lot riding on the data on construction work (Wednesday) and business investment (Thursday). Current indicators for the quarter have been weak with retail spending falling by 0.3 per cent. If business spending and construction work is similarly weak, then the prospect of a negative GDP reading comes into focus. Note that there is also a high risk of a negative GDP reading in the current March quarter due to the floods.
• Overall we expect a solid reading for business investment (private capital spending) with spending up 5 per cent in the December quarter after a 6.2 per cent lift in the September quarter.
• On Thursday, data on average weekly earnings is released. Now while this is another indicator of wages, the main interest is in the dollar figures provided for wages across sectors and states/territories.
• In the US, the President’s Day holiday kicks off proceedings on Monday. On Tuesday, the consumer confidence survey results for February will be provided together with the Cash-Schiller home price series and Richmond Fed manufacturing index. Home prices are tipped to ease 0.8 per cent in December but consumer confidence may have edged up from 60.6 to 61.6.
• On Wednesday, economists tip a flat reading for January existing home sales near a 5.28-5.30 million annual rate. The harsh snowstorms in the month may have distorted the results together with the new home sales data to be released on Thursday.
• Also on Thursday, data on durable goods orders is released together with regional gauges of activity covering Chicago and Kansas City.
• On Friday, the second estimate will be made for US economic growth in the December quarter. The statisticians take three attempts to get this one right and the first estimate showed the economy growing at a 3.2 per cent annualised pace in the December quarter.

Sharemarket

• The Australian earnings season clicks into top gear in the coming week. So far the results have proved very mixed. Resources companies have done well by consumer-facing businesses have struggled.  Companies have been reluctant to provide guidance, but the good news is that balance sheets are healthy with cash levels well up on a year ago.
• Amongst those to report on Monday include Amcor, BlueScope Steel, Goodman Group, Woodside Petroleum and West Australian News. On Tuesday AWE Limited, Mirvac, OneSteel, REA Group, Sonic  Healthcare, and Spark Infrastructure are scheduled to release earnings. A rash of companies will report on Wednesday including Asciano, AGL Energy, Carsales.com and APA Group. It’s another big day for earnings reports on Thursday with Fairfax, Origin Energy, Ramsay Health Care, PaperlinX, Toll Holdings and Pacific Brands scheduled to report. And on Friday Harvey Norman, GPT Group, Primeag, Woolworths, Goodman Fielder, Austar, APN News & Media and Blackmores are amongst those to report.

Interest rates, currencies & commodities

• For yet another week, all is quiet in currency land. The Aussie dollar is still holding near parity against the greenback despite comments from a senior IMF official that the Aussie may be over-valued by 5-15 per cent. Our CBA strategists still tip the Aussie peaking at US102c by March before easing to US92c by end year.
• Market-determined prices for iron ore haven’t been around too long, in fact most spot prices extend back only as far as late 2008. But despite not being in existence for long, prices have certainly been on a tear. The Platts 62 per cent iron ore index stood at just US$57.50 a tonne in early November 2008. By August 2009 prices had doubled to US$105.50 a tonne and by April 2010 prices hit fresh record highs of US$186 a tonne. After weakening in response to last year’s European Debt crisis, prices resumed their upwards run in late July 2010 and now are back at record highs of US$192.50 a tonne. Demand by Chinese steelmakers is unwavering while Indian supplies remain tight.

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• Weak consumer spending. Retail spending grew by just 0.2 per cent in December, below expectations centred on a rise of 0.5 per cent. In the December quarter, inflation-adjusted retail trade fell by 0.3 per cent – the first fall in 15 months. The measure of retail prices fell by 0.1 per cent in the quarter. Prices fell in seven of the 15 detailed sectors in the quarter.
• Books in; cafes out. Unpublished data shows that Aussies spent up big on newspapers and books in the December quarter together with hardware items and clothing. But spending on shoes was slashed while people made fewer visits to cafes & restaurants.
• Mixed signals on the job market. The Advantage internet job index fell by 0.4 per cent in January after falling 2.3 per cent in December. The ANZ job ads index rose by 2.4 per cent.
• Construction is sliding. The Performance of Construction index fell by 3.6 points to 40.2 in January – the lowest reading since July 2009.

What does it all mean?

• Over the last three months of 2010, more Aussies decided to get lost in a good book in their breaks from painting, decorating and home renovation projects. At the same time we made fewer outings to cafes & restaurants, bought fewer shoes and cut back on take-away food, toys and video games. Overall it seems that the average consumer has gone back in time to when life was simpler.
• It also seems that we are eating less – perhaps finally waking up to the obesity problem. For the second straight quarter, spending on food (in inflation-adjusted terms) has been cut with specialty retailers like butchers, bakers and fruit and vegetable shops seemingly the hardest hit.
• All the anecdotes from retailers have been spot on – we just aren’t in the mood to spend. Spending over the Christmas period was extremely weak with higher interest rates, electricity rates and petrol prices seemingly the main factors causing us to cut back.

• More and more retailers are feeling the bracing winds of deflation, or falling prices. In fact around half of retail sectors saw prices fall in the December quarter.
• The bad news is that picky consumers aren’t even being enticed by cheaper prices. Despite retail prices falling 0.1 per cent in the December quarter, spending went backwards by 0.3 per cent.
• It’s not all bad news for retailers. With the job market tight, wages rising and wealth at record highs, there are good reasons for consumers to start spending again. But it will require the Reserve Bank to take an extended period on the interest rate sidelines.
• Employment growth is showing mixed signals. The Advantage job index has tracked lower for two consecutive months while the ANZ job ads series has shown more subdued growth. Overall the result would please the Reserve Bank given its recent forecasts for a more sedate pace of growth in the labour market.

What do the figures show?

Retail trade (December month):

• Retail trade rose by just 0.2 per cent in December after lifting 0.4 per cent in November. Over the last five months, retail spending has gone nowhere. Over the past year retail trade rose by just 2.1 per cent.
• Spending fell most in South Australia and Tasmania (both down 1.3 per cent) with spending in the ACT down 0.5 per cent and Western Australian spending down 0.2 per cent.
• Sales by chain stores and other large retailers fell by 0.1 per cent in seasonally terms in December while sales by smaller retailers rose by 0.6 per cent. In annual terms sales at both chain stores and smaller retailers were up 2.1 per cent on a year ago.
• During December, sales increased most at footwear and jewellery outlets (up 3.6 per cent) followed by electrical and electronic goods retailers (up 2.5 per cent) and clothing outlets (up 2.3 per cent). Spending fell most at butchers, fruit & veg and other specialty retailers (down 3.1 per cent).

Retail trade (December quarter):

• Retail trade fell by 0.3 per cent in real (inflation-adjusted) terms in the December quarter after rising 0.5 per cent in the September quarter. Annual growth fell from 2.7 per cent to a two-year low of 1.1 per cent.
• The measure of retail inflation – the retail deflator – fell by 0.1 per cent in the December quarter after 0.7 per cent growth in the September quarter. Annual retail inflation fell from 1.1 per cent to 0.8 per cent in the December quarter. Deflation – falling prices – occurred in seven of the 15 retail sectors in the December quarter.
• In real terms, spending rose most in the quarter at newspapers & books outlets (up 6.1 per cent) but spending on footwear slumped by 8.4 per cent with visits to cafes and restaurants down 7.3 per cent.
• Compared with a year ago, newspapers & books spending is up 13.0 per cent in real terms with furniture & floor covering sales up 7.1 per cent. But at the other end of the scale spending at butchers, fruit & veg and other specialty retailers were down 9.5 per cent.

Performance of Construction:

• The Performance of Construction index fell by 3.6 points to 40.2 in January. Any reading below 50.0 indicates the sector is contracting. Houses, apartments, engineering and commercial construction were all below 50.
• The PCI is at the lowest level since July 2009 with the employment component the lowest since March 2009.

Job advertisements:

• The Advantage internet job index fell by 0.4 per cent in January. Job ads were weak in ACT (down 9.5 per cent) and Queensland (down 5.8 per cent) but strongest in Western Australia (up 5.8 per cent). Across sectors, gains were recorded for human resources (4.7 per cent), education (3.2 per cent) and sales and marketing (2.4 per cent). Declines were recorded for transport (-8.8 per cent), legal (-8.1 per cent) and tourism (-2.7 per cent).
• By contrast the ANZ job ad index rose by 2.4 per cent in January after lifting 1.2 per cent in November. But the index provides no break-up across states or industries.

What is the importance of the economic data?

• The Bureau of Statistics’ Retail trade publication contains the most current readings on the performance of consumer spending. The ABS surveys 500 ‘larger businesses’ and 2,750 ‘smaller businesses’. Retail trade covers spending at a broad range of retail outlets but excludes both petrol and motor vehicle sales. A weak retail trade result may point to a slowing economy as well weighing on the share prices of listed retail stocks. But retail trade estimates can’t be assessed in isolation – it is important to look at the influences determining future trends in consumer spending, such as income, employment and confidence levels.
• 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.
• The monthly Performance of Construction Index is a gauge of operation conditions across residential, commercial and engineering construction. The PCI is useful not just in showing how the construction 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?

• Day by day the Reserve Bank is being presented with more reasons to stay on the interest rate sidelines. Key sectors like manufacturing, services and construction are going backwards while deflation is taking a greater grip on the retail sector. And while retailers are cutting prices in an attempt to move stock, it seems like retailers aren’t interested.
• We just don’t know how long the current bout of consumer conservatism will last. The longer-term outlook for retailers is positive though with the job market still healthy, wages rising and wealth at record highs.
• The key issue for policy makers is to maintain a healthy labour market. As the Reserve Bank highlighted in last week’s Monetary Policy statement unemployment is forecast to only fall by about half a per cent over the next two years. A rise in productivity, weaker employment growth and a pickup in skilled migration should ensure that excessive wage growth is well contained.
• We can’t rule out the possibility that the Australian economy could experience a modest technical recession over the December 2010 and March 2011 quarters.

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The big picture

• With the first Reserve Bank Board meeting for 2011 scheduled for next Tuesday, it’s opportune to do a stock take of our current economic fortunes.
• First there is inflation. The December quarter figures confirm that inflationary pressures are well contained with prices up just 0.4 per cent. In fact the number of goods that are lower in price than a year ago is the highest for at least 20 years and probably the highest on record. And underlying inflation is at decade lows. Sure, the floods will lift food prices, but at the same time, retailers are engaged in massive discounting, keeping inflation in check.
• Second, there are the gauges of activity across the economy. The Performance of Services index has been below a reading of 50 for the past 10 months – indicating that the sector is going backwards. The equivalent indexes for manufacturing and construction are showing similar trends – that is, the sectors are contracting.
• Then there is the housing sector. New building approvals fell 4.2 per cent in November, the seventh decline in eight months. Over this time period building approvals have fallen by 23 per cent, so it is clear that home building has started 2011 in poor shape.
• And retailers also aren’t cheering at present. Retail spending rose 0.3 per cent in November after a 0.8 per cent slide in October. Annual growth of retail spending is close to the lowest levels seen in the past five years while chain store sales are growing at the slowest pace in 16 years. Retailers are actively discounting because consumers won’t spend and the news doesn’t look like getting better any time soon.
• Then there is the job market. Up until recently, the job market had been the stand-out with employment rising strongly since June. But in December employment rose by just 2,300 positions while the Advantage job ad index fell by 2.3 per cent in the month – the biggest fall since July 2009.
• And then there are the floods, disrupting coal production and general business activity. Certainly the repair and refurbishment activity will lift economic growth in the future. But that is still down the track.
• Overall it is clear that the economy has lost momentum, perhaps even contracting slightly in the December quarter. And at the same time, inflation is under control. So the Reserve Bank can sit tight on interest rates – there is no need to be lifting or cutting rates at present. We still believe that the economy will get over this flat patch, especially with our resources in big demand by Asian economies. But rates are going nowhere for now.

The week ahead

• With schools returning after the long summer break, no doubt more investors will be back at their posts. And there will be a barrage of Australian and US economic data to welcome people back in the coming week.
• In Australia, private sector credit or lending figures are released on Monday together with the RP Data-Rismark home price index. Credit probably rose modestly in December, up 0.2 per cent, while another soft result on home prices is expected after the November rate hike.
• On Tuesday the Reserve Bank Board meets while the Performance of Manufacturing index and the Bureau of Statistics house price series are released. The Reserve Bank won’t be touching rates, but investors will closely dissect the accompanying statement to gauge any subtle shifts in emphasis.
• On Wednesday the Bureau of Statistics will release price data on a raft of food items. The Bureau plans to cease production of this series – a huge disappointment as this is the only publication that details the actual prices of items regularly purchased by Aussie consumers.
• On Thursday, building approvals, international trade and the Performance of Services index will be released. We expect that building approvals improved modestly in December, lifting by 2 per cent. And a trade surplus of $1.8 billion is tipped for the month.
• And on Friday the Reserve Bank releases the Statement of Monetary Policy which should include estimates of the impact of the floods on the broader economy.
• In the US, the week kicks off with data on personal income and spending on Monday. Economists expect firm readings with income up 0.4 per cent and spending up 0.5 per cent. Purchasing manager surveys for New York and Chicago are also released.
• On Tuesday the ISM manufacturing gauge is released together with construction spending and car sales figures. Any reading for the ISM gauge above 50 means manufacturing is expanding and the current result stands at 57.0.
• On Wednesday the Challenger job layoff series and ADP employment survey are released – two useful readings on the state of the job market. The ADP survey reported that 297,000 jobs were created in December, but that strength wasn’t picked up in the official non-farm payrolls report.
• On Thursday, the ISM services index is released together with factory orders, productivity and the weekly jobless claims data (new claims for unemployment insurance).
• And on Friday, the January non-farm payroll report is released – the official gauge on job market conditions in the US. While unemployment fell in the latest month, the concern was that this reflected people giving up the search for jobs, not more people finding work.

Sharemarket

• The quarterly US profit-reporting or earnings season continues in the coming week although the majority of bellwether companies have already issued earnings. Amongst companies reporting on Monday are Exxon Mobil and Anadarko Petroleum. On Tuesday earnings are expected from Lexmark and BP. Profit results on Wednesday include those from AOL, Time Warner, YUM! Brands and News Corp. On Thursday Kellogg, Mastercard and Merck release earnings. And on Friday Fortune Brands will be amongst a small group of companies to report their results.
• So far in the US earnings season, around three-quarters of S&P 500 companies have beaten market expectations with their results– consistent with profit-reporting seasons over the past year or so.
• Also in the coming week the Australian earnings season will have its customary slow start with a number of small and mid-sized companies to release half-yearly profit results.

Interest rates, currencies & commodities

• In 2010 the Australian dollar was the second strongest currency in the globe, lifting by 12 per cent against the greenback. So how is it faring in 2011? The first month of the year is almost over and the Aussie dollar is actually in the cellar, rather than on the top shelf. Of 120 currencies monitored, the Aussie dollar has eased by 2 per cent against the US dollar, giving it a ranking of 113. Interestingly other high performers from last year are also underperforming with the Japanese yen, South African rand, Thai baht and Mongolian tugrik all lower against the greenback since the start of the year.
• Financial markets continue to believe there is more chance of a rate cut in the next three months, than a rate hike. The one-month overnight indexed swap rate stands at 4.72 per cent with the three-month rate at just under 4.75 per cent.
• For most of the period from the mid 1980s to 2002, freight costs went sideways. In fact the Baltic Dry index broadly held between 1,000-1,500 points. Then came the ascent of China and the index soared to almost 11,800. More ships were needed, and more ships were supplied. The end result? Freight costs have slumped with the Baltic Dry index now at a 2-year low of 1,234. This is good news, especially with steel production at record highs.

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