Weekend Economist: Figures of fiction

When assessing the RBA's outlook for a rate hike, investors should treat the latest jobs numbers with a healthy amount of scepticism.

Last week we saw two key barometers of the Australian economy – consumer sentiment and the monthly jobs report. One was surprisingly weak while the other was astoundingly strong – we are inclined to believe the former even if it is our own series. However there is no reason for us to change our view.

We remain comfortable with our view that the next move from the Reserve Bank of Australia will be a tightening of 25 basis points in the September quarter of next year. The stability of this view is almost unique in current markets. We have not changed our view since March this year. Since then, 24 out of 27 regular forecasters in the Bloomberg survey have changed their RBA forecasts. Nineteen have pushed back their timing for the first RBA hike (usually by six months or more) while five have abandoned their call for an RBA rate cut.

The Westpac-Melbourne Institute index of consumer sentiment fell by 4.6 per cent in September from 98.5 in August to 94.0 in September. That was a surprising and disappointing result. Following the 6.8 per cent plunge in the index in the aftermath of the federal budget in May the index had stabilised and was gaining ground. From June to August the index had lifted by 5.9 per cent to find it only 1.3 per cent below the pre-budget level. The index is now 5.8 per cent below the pre-budget level and only 1.1 per cent above the post-budget print.

Every quarter we survey respondents’ recall of major news items. In June, following the release of the commonwealth budget, 73.8 per cent of respondents recalled news items about ‘budget and taxation’. That
was a significantly higher percentage than for any other categories of news items, the next highest being ‘economic conditions’ (42.7 per cent); ‘employment’ (22.2 per cent); and ‘interest rates’ (16 per cent).

For September, ‘budget and taxation’ continues to dominate. The significant topics recalled in September are: ‘budget and taxation’ (62.7 per cent); ‘economic conditions’ (53 per cent); ‘employment’ (29.5 per cent); and ‘interest rates’ (18.1 per cent). All four topics were assessed as unfavourable although there was some marginal improvements in ‘budget and taxation’.

The proportion of respondents recalling ‘budget and taxation’ issues is the second highest since the survey was introduced in mid-70s. The highest was the June reading and this compares with other high readings of 56.3 per cent in June 2000 (associated with the introduction of the GST) and 55.2 per cent in June 2010 (associated with the announcement of the mining tax). On both of those occasions ‘news recall’ had fallen away significantly by the following quarter, to 26.7 per cent and 30.5 per cent respectively.

A reasonable summary from the ‘news heard’/‘news recall’ series is that households are a little more comfortable with the budget but it continues to dominate their thinking and they remain on edge. Furthermore, they are still quite concerned about the domestic economy and the labour market with these concerns having
deteriorated further since June.

Four of the five components of the index fell in September. One component, the sub-index tracking expectations for ‘family finances over the next 12 months’ was steady. The sub-index tracking assessments of ‘family finances compared to a year ago’ fell by 4.9 per cent. There was a sharp deterioration in respondents’ assessments of the economic outlook. The sub-indexes tracking views on “economic conditions over the next 12 months” and “economic conditions over the next five years” fell by 8.4 per cent and 9.2 per cent respectively.
The sub-index tracking assessments of ‘whether now is a good time to buy a major household item’ fell by 1.9 per cent.

Of most concern here is the five year economic outlook. This component is typically much more stable than the one year outlook but the print in September is the lowest for 16 years. That previous low coincided with the Asian financial crisis and was a much stronger negative signal from that region than we are currently seeing with the “rumblings” around China and the 36 per cent fall in the iron ore price since the beginning of the year. It is down 28.6 per cent on its level from a year ago.

Fortunately, our research has consistently shown that households assessments of their own finances and the “time to buy” sub index provide more reliable indicators of spending patterns than the “economic outlook” sub indexes.

The ‘news heard’ indexes indicated that respondents remain nervous around the labour market. These concerns were emphasised by the 2.1 per cent increase in the Westpac–Melbourne Institute unemployment expectations index (recall that a rise in the index shows heightened concerns around the employment outlook). Fortunately, the index is still 2.0 per cent below its average for the first half of 2014 but there appears to be no sign of any sustained improvement in respondents’ outlook for the labour market.

This observation implies that these households were operating in an entirely different economy to the one that purported to add a record 121,000 jobs in the August employment report that printed the day after consumer sentiment. We are deeply sceptical about this result. That is partly because “hours worked” were unchanged in the month. Both full time (14,300) and part time (106,700) jobs rose for a one per cent increase in employment for the month. On the only other times since the survey started in February 1978 when jobs growth printed more than one per cent (only five times) there was only one occasion when hours worked did not rise substantially. On that one occasion employment fell back by 0.4 per cent in the following month. We are expecting a similar cumulative correction over the next few months with annual employment growth swinging back to a sustainable 1.5 per cent in 2014 from the current 2.2 per cent (up from 0.9 per cent in the year to July). Our forecast for 2015 is unchanged at 1.8 per cent.

However, in the sentiment survey for September there was an 8.2 per cent fall in the index tracking assessments of ‘time to buy a dwelling’. This index is now 23.2 per cent below its peak level in September last year. Households are unnerved by rising prices, surmising that affordability issues are constraining the attractiveness of buying a house.

This “sentiment” is consistent with the recent release on housing finance. Annual growth in new lending to owner occupiers has fallen from 14 per cent in September 2013 to 7 per cent to July 2014 whereas annual growth in lending to investors has lifted from 24 per cent to 30 per cent.

This tilt towards investors is likely to pose the biggest concern for the RBA as we move forward. It certainly echoes the sentiment of the governor who noted in a recent speech that “while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that".

Bill Evans is chief economist with Westpac.

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