Drum Piece: Consumer Confidence

My Drum piece today is on consumer confidence and whether or not it is as important as we suppose.

It is a damn hard thing to demonstrate correlation between it and economic growth, though I’m sure it can be done – with varying degrees of confidence and holding various assumptions. 

I try to avoid too much regression analysis – though it certainly has its place, and just like looking at graphs and seeing what picture is told. Personally rather than look at “confidence” I’d rather more time is spent looking at a variety of measures (including non-economic) such as occurs with the OPEC  Better Life Index. Also we can always have a look at the good old “Misery Index” which adds the unemployment rate and inflation rates together (a lower score means less ‘misery’):

Here, by comparison, is the Westpac Melbourne Institute Consumer Confidence Index over the same period:

And together:

Which perhaps suggests, we’re more confident about our misery now…

Anyhow here are the graphs:

Here’s a similar graph looking at a few more countries:

March Wage Price Index: Where’s my wages breakout??

Today the ABS released its quarterly wage price index figures, and once again we found that unions are absolutely incapable of delivering what the right-wing press and Liberal Party expect them to do.

Wages break out? That’d be a no:

The Annual Wage Price Index shows the same thing:

And if we look at the Wage Price Index over inflation, we see an uptick in real terms, but this is due mostly to the absurdly low quarterly rate of inflation – a mere 0.3% in trimmed means terms – the lowest increase since 1998. 

Pretty much the worst spin the you could put on it was that the rise was “above expectations”:

The wage price index advanced 3.6 per cent in the first quarter from a year earlier, today’s report showed. Economists forecast a 3.5 per cent gain from a year earlier.

The big wage increase was in mining – not surprising, that’s where the demand for labour is:

Mining has shown an increase of late – a 2.2% jump in the wage price index in the March quarter:

But as we can see on annual growth terms it is well below where it was in 2008 (ie prior to the introduction of the Fair Work Act), and around where it was in 2005 and 2006. The simple fact is demand does drive wages – and so too do skill shortages. What is important is that wage growth in a booming sector does not lead to growth in other sectors which are not booming. Clearly wages growth in the mining industry is not flowing into other industries.

A year ago the Shadow IR Spokesman Eric Abetz gave a speech to the Australian Industry Group. He said:

The Coalition is concerned that we will see huge levels of wages growth across Australia if action is not taken to ensure sustainable pay increases
….
Such unsustainable wages growth [in the construction sector] will increase inflation, increase the cost of living and increase pressure on interest rates. That destructive trifecta always results in job losses.
…
The simple fact is Labor has strengthened  the unions’ hand  by expanding right of entry. They have allowed the Australian Building and Construction Commission to be weakened and are now allowing wages growth to spiral out of control.

Abetz must be quite glad that in the 12 months since he made that speech, wages growth in the construction industry has stayed steady – and below that seen from 2004-2009:

Used to be a time a “wages spiral” actually led to increased wages…

As for Abetz’s concerns about inflation – lets have a look at how that’s gone in the time since Abetz gave his speech:

:

Interest rates? Well since Abetz gave his speech the cash rate has dropped a full one percentage point.

And job losses? Well as we we saw last week, the unemployment rate is now 4.9% – below the 10 year average of 5.2%.

Someone should let Abetz know that he can sleep soundly – his worries were just figments of his imagination.

Drum Piece: The Unemployment Rate

My Drum piece this week is on last week’s unemployment figures, and has a look a bit deeper than just the usual big number – using a few bits of data which regular readers will have seen a fair bit of on this blog.

For some reason a couple of the graphs went screwy on the website (or they did for some, but not for others – apparently this is because they’re in jpeg form, so I’ll use PNG or GIF in future) so here they all are in nice size (and crucially you can click on them to get a bigger view – God knows why that can’t happen on The Drum site). My favourite one is at the end, I think it captures the :

The seasonal figure jumps around much more than the trend (not surprise – it’s not meant to)

The revision of the trend rate in April shows a rather different picture to what was seen in March

Trend employment growth is positive, but pretty weak and flat

Participation continues its fall from the record high of October 2010

 

Hours worked shows four months of positive growth, but has it peaked?

Full time jobs can’t keep pace with population growth (thanks Matt Cowgill – for the graph, not the lack of FT employment, but then he works for the ACTU, so no doubt he and his “wages breakout” are to blame :-) )

Underemployment is pretty flat, and since 2005 it follows the movement of the unemployment rate.

During the GFC the big fall was not in employment as a percentage of population, but hours worked per person – ie cut back in hours rather than sackings.

Looking at unemployment rates, you’d think the USA and Australia were similar in the 2000s, and that the USA doesn’t have too far to get back to equal with us

Looking at employment to population ratio shows just how different our economies were in the early to mid 2000s, and how big a hole the USA is in. 

Plus here’s one other – the Australian dollar is on a serious sliding right now, the red line is the price since the RBA dropped the cash rate on 1 May:

Drum Piece–the budget (billions/millions)

My Drum piece of yesterday was on the Budget (of course).

I made a dumb error with the billion/million on the debt limit. In my original version I had it correctly at 250 billion. Someone on twitter suggested I had made a mistake re billion/million. I was actually at the pub last night having drinks when I read this and so I looked online at my piece and saw “250 billion” which I was sure was right, but I went on the AOFM site to double check and looking on my iphone saw “$228,826m” and I quickly and stupidly thought “Oh no it’s an ‘m’!!!”, and so quickly emailed the editor of the site to change it. The million/billion error was actually for another figure (which was corrected).

Auuuuuuuuuuugggggggggghhhhhhh.

An inexcusable error, so idiotically stupid of me.

Please be aware I have slapped myself in the face repeatedly in despair.

Anyhoo here are the graphs.

Unemployment rate: Down to 4.9%

Well that’s a bit of a shock. Today the ABS announced that the seasonally adjusted unemployment rate fell from 5.2% to 4.9%. No one expected this. The trend measure – which doesn’t get as excited as the seasonally adjusted version, came in at a bit more calm 5.1% (in fact exhibiting no change from the previous month):

The drop to 4.9% all sounds pretty stunning, but a look at the rate over the past five years, shows us not to get too excited:

It’s been pretty flat since about half way through 2010. And a look at actual employment numbers shows again that we’re not quite in boom time yet:

In March there was a big jump in seasonal employment, in April it was less big, thus the trend growth is flattening, rather than going up like it was at the end of 2009.

The ABS also notes: “Employment increased 15,500 (0.1%) to 11,501,000. Full-time employment decreased 10,500 (0.1%) to 8,062,800 and part-time employment increased 26,000 (0.8%) to 3,438,200.

A decrease in full time employment is not what you aim for, but the trend growth ensured that hours of work in trend terms increased for the 4th straight month.

The decline in full time employment suggest male employment is likely to not be as good as women, and so the figures show:

Female employment grew in trend terms by 0.15% compared to males at 0.05%.

The participation rate was basically steady – though it did fall by 0.1% in seasonal terms:

And we can see that the trend of the participation rate is yet to suggest that there are more people joining the workforce. This leads to my favourite measure of employment – the employment to total population ratio

On this measure the seasonally adjusted improvement is less pronounced – it went from 61.960% (rounded up to 62.0%) to 61.978% (rounded up to 62.0%).

So for all those thinking this result makes a mockery of the RBA dropping rates, I say, the employment sector is not booming, is still pretty flat, and hasn’t got close to returning to where we were prior to the GFC:

A look at the states also gives us an indicator of how varied the picture is:

Barely anything happened in QLD, NSW went down, so too did SA, but their decline was largely cancelled out by the growth in Victoria. Western Australia continues to boom, while Tasmania remains the place where employment goes to die. A look at the growth in employment since July 2010 shows the WA is really the only state growing in a manner that suggests a drop in interest rates was not needed:

The Government will claim this as good news (and hell, so it should), there are always issues with the unemployment rate on whether or not it really measures how the economy is going, but 4.9% is a good rate: historically low, and given we also have historically low inflation, the government has every right to crow.

And to end let’s have a look at the “Hey America and Britain, How you doing?”

And just in case you think I am being too negative – look at the historical picture:

We’re doing well.

RBA cuts cash rate to 3.75%

Well the RBA was bold, and today cut the cash rate by 50 basis points to 3.75%.

The reason? Well as anyone who has noticed graphs like those here, here, here and here would have known that the economy is not running above trend, and the latest inflation figures (which it should be noted referred to Jan-March, so are a bit of a lag) showed inflation was not of great concern.

Also banks are crying poor and saying funding costs are killing them so it is likely they won’t drop them by the full amount, so the RBA obviously believes to get the banks to drop rates by the amount they really want, they needed to go 50 basis points rather than just 25.

The RBA notes did however contain this nice line:

At the margin, wholesale funding costs have declined over recent months,

But don’t worry, banks won’t drop rates b the full amount, and the reason they won’t is because they don’t have to.

So let’s have a look at the graphs:

The 20 year average for the cash rate is 5.1%. The Howard Government average was 5.4%. But how is it going in the real world?

I have factored in banks dropping their rates by 40 basis points (this might be generous). On this score it would get the average standard variable home loan to 7%. The 20 years average for such rates is 7.8% (the Howard Govt average was 7.26%). Where life is less good is for small businesses and the rates for small overdrafts Even a 40 basis point drop on this would only get such rates to 10.4% above the 20 year average of 9.85% and also the Howard Govt’s average of 9.36%. The reason why despite the cash rate being at such lows, the mortgage and small business overdraft rates not being so historically low? The below graph shows:

While the spread of home loans to the cash rate is now up around where it was in 1994-95, the small; overdraft spread is nearly 2 percentage points higher than it ever has been in the past 20 years.

And note as well if the banks don’t drop rates by the 50 basis points, this spread increases.

Yeah I’ll say it – bastards.

***

Also there’s been a lot of talk about the budget and interest rates. Joe Hockey laughably suggested because the RBA notes didn’t mention the proposed surplus that showed that it had nothing to do with. Others (like Abbott and Hockey) are suggesting that those who think a surplus will allow for lower rates are going against what was said during the GFC. Abbott is even suggesting that Swan and Gillard saying such things shows that they were wrong during the GFC.

Well geez, Tony, let me walk you through it. During the GFC both monetary and fiscal policy were pumping the economy. As everyone knew then, if there had been less fiscal stimulus there would have needed to be more monetary stimulus (ie lower rates). No one disputed this. What they did dispute was whether this was a good thing (RBA chief Glenn Stevens was one who suggested lower rates would not necessarily be good policy). You only need to see the near zero rate in the USA, Japan and UK to see that rock bottom interest rates don’t correlate all that well with strong GDP growth.

This time round, the Government has decided that growth while below trend is not in danger over going negative, and thus had decided to leave the pumping of the economy to the RBA, and thus interest rates fell. If the Government had been flagging another deficit – say 1% of GDP, then I doubt very much if the RBA would have dropped rates. They would likely have seen what type of a deficit was being run – ie one aimed at increasing consumer spending or one aimed at areas such as infrastructure.

Some economists (and commentators) think the Govt should be doing its bit and using the fiscal lever to pump the economy as well. That’s fine, but you can’t criticise the Government for returning to surplus and also criticise it for running an economy where interest rates are being cut. It is not a sign (as Hockey would have you) that the Government has lost control of the economy, it is actually a sign the things are happening as the Government is hoping they will happen. 

It is still a bet though whether it will work. Interest rate drops can take a while to improve growth in the economy, and if it doesn't you can sure bet the opposition will conveniently forget it too is in love with a budget surplus.

One last thing. The unemployment rate is now 5.2%, the 20 year average is 6.8%. The inflation rate is at 2.2%, the 20 year average is 2.7%.

Low unemployment and low inflation. If that is the Government losing control of the economy, then Joe Hockey really needs to have a lie down, because reality is getting too much for him.