A reality check for Australia's economic pessimists

Policymakers and pessimistic talking heads have long anticipated the Australian economy's demise, but positive news out of the US should prove them wrong.

In the same month that the Australian Bureau of Statistics supposedly transformed a strong labour market into a weak one, businesses are reporting the strongest conditions since the GFC. Though it’s admittedly tentative, conditions are reported as strong -- the largest uptick on record -- yet confidence has slipped a bit.

That’s not actually as inconsistent or mixed as it sounds. For a start, in the new normal, a confidence reading of 4 is quite good. The historical average is only about 5.8 and in the past, we haven’t had to deal with the ‘keep the fear alive’ campaign that we have now. Don’t forget our policymakers and plenty of others are doing their damnedest to talk Australia into a downturn. No shortage of reasons why, including corporate welfare and influencing policy outcomes.

More to the point, politicians and bureaucrats have failed to rein in Australia’s budget deficit for what must be the fifth year running. Apparently MYEFO is going to report a $50 billion blowout. With that in mind, it just wouldn’t do to talk about Australia’s above-trend economic growth and strong national income growth. It’d smell too much like incompetence.

The dip in confidence isn’t all that odd as conditions surge. Partly that’s because they’re both confidence indicators anyway. So what business is saying is: ‘We’re currently feeling great about things -- we’ve noticed a huge pick-up in activity, but we’re not sure if it’ll last. Apparently there is a slowdown on as the mining booms ends and the unemployment rate surges -- we'll all be rooned.’

That some businesses think that way is of no surprise, given the constant flow of misleading rhetoric on the Aussie economy. Having said that, I think we’re getting to the point where it doesn’t really matter what Australia’s pessimistic talking heads and policy daleks say; the surge in business conditions (not to mention house prices) is only just the start.

I’m not suggesting for one minute that NAB’s business survey isn’t volatile. It is, but notwithstanding some pull-back next month, it seems quite clear that business is becoming more confident.

The main reason for that is, quite simply, because the US economy is surging. Don’t think this doesn’t matter for Australia. It’s not just the trade links or the cultural bonds that bind. There is a strong correlation between GDP and employment outcomes which goes beyond this, similar to what you see on financial markets: the US leads the world. What happens there happens here -- eventually.

It’s like a psychological link. You see it everywhere, through our policy wonks and ministers regurgitating, often word for word, slogans and statements that come from the US. And who could forget the then prime minister Julia Gillard’s wardrobe addition after a Hillary Clinton visit.  The links may be subtle -- or maybe not so subtle -- but they are real.

On that front, we know the US economy is booming. Following a v-shaped recovery post the GFC and one of the strongest post-recession recoveries on record, the US economy is accelerating further. Jobs growth is at a 15-year high and has had the best run since World War II. Equities are at record highs and there is absolutely no sign any of this is about to end. If anything, the US is only just moving into top gear.  Check out Chart 1.

Chart 1: US unemployment rate about to hit 5 per cent

With filings for unemployment insurance at a 14-year low, the unemployment rate drop we’ve seen so far is on pretty solid ground. Indeed we shouldn’t be surprised to see an unemployment rate around 5 per cent by early-mid next year. That means the strong growth outcomes we’ve seen in the US are only going to get stronger, which of course means a sizable lift to animal spirits here. 

It’s not just the jobless claims numbers that are showing this. The best lead indicator on the US economy, the ISM index, is around its 30-year highs. 

Chart 2: ISM index near a 30-year high

The hordes of dead-eyed, zombie-recession freaks that seem to have populated our country can’t hope to compete with that. They’ve been out PR’d by reality. Even the US Federal Reserve has capitulated to the facts. That business is becoming more confident, reporting stronger conditions, is critical for Australia, for a country that had no reason to expect a downturn. No imbalances or excess, just sloppy analysis from doomsayers and some of the worst policy leaders in a generation. Confidence was the missing ingredient -- it has turned. That the US economy is surging and accelerating means that we will continue to see an ongoing positive impact on animals spirits here.

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