the economic signals report -...

October 17

BY Paul Colgan and David McDonald

REPORT

The Economic Signals Report

BUSINESS INSIDER AUSTRALIA / RESEARCH

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Contents

Introduction 2

Understanding Australia’s jobs data 3

New trends in work 6

Why economic indicators matter for executives 9

A guide to the key indicators 10

Conclusion 35


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Introduction

How we track our economy influences everything from government spending and taxes to home

lending and business investment.

Tracking the economy is not a simple task. Businesses need to wade through a plethora of data

regularly to understand trends and forecast demand for their products and services.

From the monthly or quarterly data releases by the Australian Bureau of Statistics, to central

bank rate decisions and statements on the economy, or private sector data such as purchasing

managers’ indices, there are vast amounts of economic signals available to businesses to help

inform strategy and planning.

The challenge is to piece together the various data points, determining the relevant signals

amidst the noise to help illuminate the path ahead. A complicating factor is how changes in

technology, the workplace, and the economy at large mean data collection models designed

decades earlier may now be inadequate.

This report is designed to help executives, company directors, and business planners think

about economic data.

It starts with an overview of the most important economic indicator: employment. We also look

at the challenges posed by the growth of the freelance economy when it comes to measuring

jobs, and look at the implications of research from a US think tank on this tricky subject.

This report then sets out other key data points that serve as a barometer for current and future

economic performance. These include high-level data releases such as jobs, inflation, economic

growth, capital expenditure, wages, monetary policy decisions, and some of the qualitative

commentary coming out of the central bank. We trust you’ll find it useful.


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Understanding Australia’s jobs data

ABS employment data, 2007-2017

The ABS releases Labour Force data on a monthly basis. It is a vital indicator for

business planning and executives should understand how it is measured and

why it matters.

Each month, the ABS publishes basis the change in the number of people employed, the

unemployment rate and the participation rate. Many people mistakenly believe that the

unemployment rate is based on Centrelink data, but in fact the numbers are estimated from a

survey of around 26,000 households or 0.32% of the population over the age of 15. The

households in the survey are rotated every eight months, with one eighth of the sample being


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replaced each month.

The first thing the ABS tells us is the estimate of the number of people employed and the change

over the past month. This is broken down into full-time and part-time employment. It is

important to highlight that the ABS estimates the number of people employed rather

than the number of jobs. Therefore, somebody working in two part-time jobs would still

only count as one employed person. This is important to highlight and perhaps becoming more

relevant given the growth of casual and part-time work and the emergence of the “gig economy”.

The ABS notes that this is different to its business surveys. Estimates of employment from

business surveys refer to jobs rather than persons. For example, people holding jobs with

different employers would be counted in ABS household surveys as employed once, but in ABS

business surveys would be counted once for each job held.

What is counted as being employed? The notion of work is interpreted as work for at least

one hour. The ABS tells us that this approach ensures consistency between measures of

employment and measures of production of goods and services, as all work (however little)

contributing to national production is included in measures of employment. This is also in

keeping with international statistical standards used by most developed countries.

The monthly ABS release does not tell us the sectors where jobs are being created. But the ABS

does release a more detailed set of data on a quarterly basis that breaks down employment by

industry and sector (as well as by other criteria such as education levels, sex, age).

The other data points highlighted in the ABS release are the participation rate and the

unemployment rate. The participation rate shows the percentage of the population (over the

age of 15) in employment or actively seeking employment. This varies with the economic cycle

and confidence levels. When unemployment is high and confidence down, many people might

“not bother” actively seeking employment as they believe there is “no point” looking if there are

no jobs available. When business conditions pick up and employers increase hiring, the

unemployment rate might not fall initially if the participation rate goes up, as more people start

looking for jobs.


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The unemployment rate is quite simply the mathematical outcome of the number of people

looking for work but not currently employed divided by the workforce (population times

participation rate). It does not show whether people would like to work more or if a part-time

worker is still looking for that second job.

So why should executives focus on these numbers? Employment growth and the

unemployment rate are key signals of both economic activity and confidence. More people

employed simplistically shows that there are more people earning money and therefore able to

spend. Indirectly, the consumer will often see lower unemployment as a sign of confidence that

the economy is doing well and that their own job is secure. Consumers are therefore more likely

to spend. This is particularly the case for large purchases such as cars, white goods, and even

houses, where the consumer needs to feel positive about the broader economy as well as their

own situation before leaping into a big purchase.

If businesses are hiring more people, this is also a signal that they are confident in their own

outlook, revenue growth and profitability. They are then more likely to spend on capital

equipment or build or lease new premises. Firms dealing with business customers rather than

individual consumers can also read the ABS labour force data for signs of the likely prospects

for their revenues.


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New jobs challenges

Australia’s Labour Force Survey (LFS) at best returns the measure of employment and not the

number of jobs. It focuses on the main job of the respondent and ignores the second or third

roles.

Take for example, a person might work as a handyman for 15 hours a week and then

supplements his/her income by working as an Uber driver for another 10 hours and a Deliveroo

person for another five hours. The ABS deems them as one person employed part-time, or

working fewer than 35 hours.

If that person worked five more hours as an Uber driver the next week, they would be classified

as full-time (35 hours) but the handyman job would still determine the industry in which they

are employed.

There is more than one job being done, but the ABS employment estimate only counts one.

So clearly the headline numbers of 30,000 job adds or losses are not – in the truest statistical

sense – reflective of what’s happening in the economy. But this data goes into the future

modelling for government finances, business investment and bank lending.

The estimate also doesn’t distinguish between the types of workers. More than one million

people work as independent contractors like construction workers or perform roles such as

beauticians working from home. However, in the figures they are not captured independently.

For non-employees the question of whether they are prepared to start work and have been

actively looking for work can also be complex. Someone doing consultancy work might not

actively look for work because clients seek them out instead.

The ABS is certainly aware of the shortcoming of its survey, so it also conducts others –

including the Characteristics of Employment Survey, which goes into the information on all

employed persons according to their status of employment. However even this survey still looks

at the classification of the main job and doesn’t capture the sharing or gig economy workforce

properly.

http://www.abs.gov.au/ausstats/[email protected]/mf/6202.0

http://www.abs.gov.au/ausstats/[email protected]/mf/6333.0


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The ABS, in a statement to BI Research, pointed to the main characteristics of the LFS and said

the Labour Force questionnaire was not designed to capture the nature of the respondents' work

in terms of short-term contract or freelance.

This is not a problem unique to Australia. Other developed nations, including the US, have had

similar problems. The US previously tracked so-called "contingent" workers or the employees

who don’t possess long-term employment contracts. But the reading was not considered reliable

and was discontinued in 2005.

However the Brookings Institution’s Metropolitan Policy Program is now leaning on a little-

known statistic to capture the data.

To measure the rise of the gig economy, the researchers at the Institution looked at data from

the US Census Bureau that tracks "non-employer firms," which are businesses that earn at least

$1,000 a years in gross revenue, but employ no workers. The Census data is based on tax

records. As you can see, the number of the number of these “non-employer firms” has been

surging relative to the total number of people employed.

It turned to that piece of data as, by definition, people earning money through companies like

Airbnb and Uber are not employees of those companies themselves and are not listed on any

official forms. As privately held companies, the major players in the gig economy aren't required

to disclose anything like employee numbers, revenue or profits.

It's not a perfect measure: non-employer firms don't specifically equate to workers in the gig

economy. But such firms may be a useful proxy for the prevalence of their use by workers.

The researchers focused on two industries in particular, which they call rides and rooms –

ground transportation and traveller accommodations. Those industries were picked as they

form the most well-known and biggest components of the gig economy. This could be a possible

model for Australia too.

http://www.census.gov/econ/nonemployer/


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Clearly capturing the data properly has implications beyond measurements of employment: if

the ABS included gig economy employment in its monthly jobs report, for example, it's possible

the country's unemployment could appear lower, which could alter the RBA’s views on the

strengths of the economy. It has implication on company investment as stronger employment

numbers points to better demand. Consumer confidence could pep up too.

In all, it’s a heady cocktail but one which can’t be ignored for too long given the implications for

policy makers, companies and employees.


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Why economic indicators matter

for business leaders

Economic indicators are key statistics that indicate the direction of an economy.

Such indicators point to the health of a nation’s economy, regional trends and fortunes of global

growth and consumption. Successful companies put a lot of time and effort in to reading the tea

leaves before they embark on major investment decisions.

A survey of almost 1000 members of the Australian Institute of Company Directors in late 2016

found that global economic uncertainty was the No.1 concern of directors, while also identifying

economic policy uncertainty as the No.1 likely source of business disruption.

Why do directors’ views matter?

Board members are likely to factor in their pessimism or optimism as they advise their

companies on plans including mergers and acquisitions, resource allocations and expenditures

in the coming year. With so much uncertainty at play, it has never been more important to

understand the available data on the health of the economy.

Traditionally there has been strong correlations between economic growth, as measured by

GDP, and corporate profit expansion. However, determining whether a specific company may

grow its earnings based on one indicator of GDP is nearly impossible. Indicators provide signs

along the road. Boards that spot patterns and trends by piecing together multiple sets of data

are successful.

Indicators can be numerous, there are three broad categories of economic indicators: leading

indicators, coincident indicators and lagging indicators.

Leading indicators, such as consumer durables, purchasing managers’ indices (PMIs), net

business formations, and share prices, point to the future direction of an economy. Coincident

indicators, which include such things as GDP and retail sales, are seen with the occurrence of

specific economic activities. Finally, lagging indicators, such as job creation levels and

consumer prices, are only seen after a specific economic activity occurs.


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A guide to the key economic indicators

Stocks

Daily news programs report on stock market movements – here’s what they say

about the business environment

The ASX 200 index is the most closely watched local benchmark. This a weighted index of the

largest 200 companies listed on the Australian Stock Exchange. Financial news reports usually

also focus on the US market. The S&P 500 is the index of the largest 500 companies listed on

the New York Stock Exchange. Elsewhere, the FTSE 100 is the UK benchmark, the DAX is the

German index and the Nikkei Index is the benchmark most often quoted for the Japanese

market.

It is generally accepted that the stock market is a leading indicator of the economy (though its

track record is far from perfect). Stock prices tend to anticipate a pick up or slowdown in the

economy. For this reason alone, the recent trend in the local index is something that can

provide a guide for executives. The Australian market is also influenced by global events and

commodity prices.

A strongly performing stock market also generally means it is cheaper for companies to raise

equity finance if needed for expansion or merger & acquisition activity. The performance of

individual stock prices or sectors of the market gives a guide to how professional investors

(superannuation funds and major brokers) see the prospects for that particular company or

sector and provide feedback to management on how their corporate strategy is being viewed.


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Bonds

Bonds don’t get as many headlines as stocks – but here’s why you should pay

attention to them

The bond market does not normally get as much attention as the stock market but is an equally

important indicator of risk appetite and the outlook for the economy and, in particular, interest

rates. The government bond is seen as the ultimate risk-free investment and used as a

benchmark in valuing many other assets. The Australian government is one of only a handful in

the world still to have a triple-A rating from the major rating agencies. The federal government

(and the states) issue bonds to finance the budget. The 10-year Australian government bond

yield (current interest rate) is the main benchmark and is generally reported in most financial

publications.

Bond prices fall when interest rates (the yield on the bond) rise, and rise when yields are falling.

Rising bond yields are generally a sign that financial markets expect stronger economic activity

(and therefore a likely increase in interest rates) or higher inflation. Given that the bond yield

partly reflects the credit worthiness of the borrower, a higher government budget deficit will

also often lead to higher bond yields. At present, Australian government debt as a percentage of

GDP remains low compared to most developed economies. And yields are low, so the

government can borrow relatively cheaply.

As government bonds are seen as a “safe haven”, yields are normally low when markets are

concerned about the economic outlook or global political events such as geopolitical tensions or

elections in major economies). Although a low bond yield might signal a cautious economic

outlook, it also gives companies the chance to borrow money at lower interest rates. If corporate

treasurers are willing to look further ahead or can see opportunities, low interest rates provide

an opportune time to raise corporate debt. Bond yields have been unusually low in the past few

years, in part because of high demand from central bank buying. As part of their efforts to

reflate the economy after the financial crisis and spur investment spending, central banks in the

USA, Europe, the UK, and Japan have all been buying government bonds and thus keeping

yields very low.


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Large movements in the bond market can be a sign of trouble. A sudden plunge in yields means

the market sees a higher premium on very safe assets. On the other hand, a sudden rise in yields

can mean rapidly rising interest rates which can pose a risk to some businesses, as well as

reducing the capital value of the bonds held.


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Iron Ore

Iron ore is Australia’s largest export in dollar terms by some margin (worth

$48bn in 2015-16 and amounting to 15% of our total exports). It may be a long-

established industry, but ore prices remain important to the overall health of the

Australian economy

The iron ore price is central to Australia’s economic prospects and also has an influence on the

level of the Australian dollar. As a key input into the Chinese growth story, the iron ore price is

also often viewed as a confidence vote in the outlook for China. Australia is the largest iron ore

exporter globally, with Brazil the other major player.

In September this year the iron ore price was US$70 per tonne, but fell at the end of the month.

This is a profitable level for Australian iron ore producers who mostly have cash costs below

$US30. During the recent commodity boom, the iron ore price was trading at more than double

this level, delivering super-profits for the major mining companies and leading to a huge

expansion of the industry in Western Australia.


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Iron ore (along with coking coal) is a major ingredient into steel manufacture. Although China

does have some domestic supply, it is generally of lower quality and higher cost than Australian

iron ore. As China moves from a construction/infrastructure led economy to more of a

consumer driven one, growth in demand for iron ore is likely to slow. However, Japan, Korea

and Taiwan also remain large markets for Australian iron ore, and the RBA recently noted that

India could be a significant source of future demand, although that has yet to materialise. Iron

ore export volumes are reported by the ABS as part of the monthly trade data but the mining

companies also report quarterly volume and pricing data to the stock exchange.

Daily spot prices are reported by the Metal Bulletin Iron Ore Index, although this market has

become volatile over the past two years with the entry of Chinese retail investors.

Australia is also poised to become the world’s largest exporter of LNG. LNG will become our

second biggest export and depending on price moves could challenge iron ore for dominance.


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Visitor Arrivals

One statistic that is becoming more and more important to Australia is the

number of overseas visitors. Growth in tourist numbers has been steaming along

and this is becoming an increasingly important driver of overall economic

activity

Although still short of export earnings from iron ore, the income from visitors (both tourists and

overseas students) is rising rapidly and closing the gap. According to ABS data, in 2015-16, total

visitors contributed more to our export earnings than coal and are now second behind iron ore

as our major earner. Visitor arrivals are reported monthly by the ABS and show both numbers

and country of origin. Sydney Airport Corporation also reports monthly arrivals numbers to the

stock exchange.

As an indication of both the growth and the continued potential for visitors to contribute to our

economy, Sydney airport now has seven different Chinese airlines flying between Sydney and

cities in China. As of this year, Chinese now outnumber New Zealanders as Australia’s biggest


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visitors. (The ABS reported that short-term visitors from China rose by 18% in the year to July

2017 whereas visitors from New Zealand were unchanged on a year earlier).

For any business connected to tourism – whether directly through accommodation, transport

and dining, or indirectly via sectors such as retail – a focus on these figures and trends in

growth are a key factor to accommodate in business planning.


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Retail Sales

Retail sales data is released monthly by the Australian Bureau of Statistics. It is

a key indicator of consumer activity and confidence

The data released by ABS is in nominal terms (that is, it reports dollar value rather than

volumes, although volumes are reported quarterly). So, if stores are discounting more often to

boost sales, the retail sales numbers will appear weaker even though they may be selling more

items. The breakdown of the data also shows trends in different sectors, as more than a dozen

sub-groups are detailed by the ABS, ranging from household goods, and clothing to cafes,

restaurants & takeaway food. The sub-groups, for example, show how department store sales

have been struggling for some years in Australia as consumers increasingly shop online. The

ABS also breaks down the data by state.

There are many influences on retail sales. A strong housing market and increased construction

activity for example would usually lead to an increase in demand for whitegoods, furniture and

related goods. Strong employment growth and lower unemployment give a boost to consumer

confidence and should see rising retail sales. Business executives can look to retail sales trends


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for a guide to the mood of the consumer. The RBA also looks at retail sales data as part of its

focus on economic activity in deciding the appropriate level of interest rates.

Retail sales is another sector of the economy that could potentially get a boost from visitor

activity. More visitors to Australia should mean an increase in retail spending, particularly in

areas such as restaurants and cafes.


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The Reserve Bank of Australia (RBA) cash rate decision

The RBA meets the first Tuesday of each month (except January) and decides on

the official interest rate, as well as commenting on the state of the economy and

the forces affecting it

The RBA is Australia's central bank and derives its functions and powers from the Reserve Bank

Act 1959. Its duty is to contribute to the stability of the currency, full employment, and the

economic prosperity and welfare of the Australian people. The key way it does this is by

controlling the cash rate. This “official interest rate” helps determine borrowing costs for banks

and thus for consumers and businesses in the Australian economy. The major focus of the RBA

in setting the cash rate is the medium-term outlook for inflation. The RBA has a target for

inflation of 2-3% through the economic cycle.

The cash rate is determined by the RBA board. The board comprises the Governor of the RBA,

the Secretary to the Treasury and independent directors nominated by the federal government.

The current governor of the Reserve Bank is Philip Lowe who was appointed in September


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2016.

After the meeting on the first Tuesday of every month (with the exception of a summer break in

January), the board announces its interest rate decision at 2:30pm, Sydney time. This is one of

the most closely watched data points in the economic calendar. It is a particular focus for

currency markets, with the AUD often reacting to both the rate level and the wording of the

announcement, which provides a summary of the assessment of the bank on the state of the

economy and may offer indications as to future policy directions.

The cash rate is currently at 1.5%. It has been at this extraordinarily low level since August 2016

after the board cut the rate by two lots of 0.25% in May and August that year. While very low by

historical standards, the 1.5% rate is still well above the interest rate set by most major central

banks offshore. The US Federal Reserve has begun raising rates but still has a rate of 1.0-1.25%.

The European Central Bank (ECB) has maintained negative interest rates on deposits, as has

the Bank of Japan.

The commentary from the Reserve Bank Board meetings gives business leaders a good insight

into current economic conditions in Australia and where the RBA sees the trends moving in the

coming months.


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Other RBA publications

RBA statements: The RBA publishes statements including its monthly interest rate decision,

minutes of its monthly meeting, quarterly statement on monetary policy, and semi-annual

financial stability review.

While these are regular statements, they are gaining in significance with the increased

sophistication of the central bank’s business liaison programs.

The RBA has had informal contacts with businesses dating back to the 1960s. In 2001, it put

together a formal program of business liaison as the information provided by firms can assist in

understanding current and future trends in the domestic economy.

The program has around 15 economists and additional support staff. The main focus of the

business liaison program is to hold regular discussions with external contacts. Over time, Bank

staff have established relationships across a broad cross-section of the business community, and

there are currently around 1000 active contacts across the country.

Liaison meetings are undertaken continually rather than during a specific reference period, with

around 70–80 discussions occurring monthly. Discussions with individual firms occur around

every 6 to 12 months, with Bank staff usually meeting the chief executive officer, chief financial

officer and/or operations manager.

The overriding motivation of the program is to build a better understanding about how each

industry is structured, the current stage of its business cycle, the challenges and opportunities

faced over the medium to longer term, and how companies are responding to the domestic and

international circumstances they face.

The Bank also meets with firms in the household services sector, such as in the child care,

domestic education, health and aged care industries. This sector has been a major driver of

employment in the economy for an extended period.

Liaison information is also used to help understand the economic trends reported in official

data, including for inflation. Business liaison provides an independent source of information

that can be compared with official releases to assist the Bank in distinguishing signal from noise


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in economy-wide data, though the signals form a comparatively small sample.

The summary messages derived from the Bank’s liaison process are integrated with the advice

provided to the Board and are communicated to the public through the Bank’s regular

statements and reports as well as speeches by senior staff.


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The Consumer Price Index

The rate of inflation is a vital indicator on the state of the economy and

important for businesses to understand, as it offers signals on both costs and

pricing power

The Consumer Price Index (CPI) is released by the ABS quarterly. It is a measure of the change

in prices of a fixed basket of goods and services generally bought by households. The basket of

goods and services included is calculated based on the ABS household expenditure survey. It

measures movements in retail prices of goods and services commonly purchased by

metropolitan households.

The goods and services are divided into the following groups: food and non-alcoholic beverages;

alcohol and tobacco; clothing and footwear; housing; furnishings, household equipment and

services; health; transport; communication; recreation and culture; education; and insurance


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and financial services. Indexes for each of these groups and for “All Groups CPI” are published

for each of the state capitals along with Canberra and Darwin, and for the weighted average of

the eight capital cities.

The CPI does not account for quality changes. So, for example, an iPhone that has twice the

features of the previous model but is only 2% dearer would simply be recorded as suggesting

higher prices for that category of consumer purchases.

Changes in the CPI are generally described as the inflation rate. It is one of the key measures the

RBA looks at in setting interest rates. Too little inflation can be a bad thing as it suggests a

sluggish economy and encourages households to defer spending if they believe prices are

stagnant. Too much inflation on the other hand is also a bad thing. Rapidly rising prices suggest

an overheating economy and put pressure on wages and other business inputs. Rapidly rising

inflation also eats into people’s savings and is particularly harmful for retirees or people on

fixed incomes.

The ABS publishes several versions of the CPI: all groups (original), trimmed mean and

weighted median. We won’t attempt a briefing on the statistical methods used to calculate the

trimmed mean and weighted median. The main point to highlight is that the RBA focuses on the

(less volatile) trimmed mean when assessing inflation relative to its 2-3% target. The ABS also

publishes a CPI series excluding “volatile items” – removing petrol, fruit, and vegetables from

the calculation, as these items tend to jump around considerably based on non-fundamental

factors such as agricultural conditions and offshore oil price movements. Excluding these gives

a better indication of the underlying trend of inflation in the economy.

Broadly speaking, low inflation environments can mean companies lack pricing power,

dampening margins. Stronger inflation can mean companies are able to charge more for their

goods or services, but it also is likely to mean cost inputs are higher at the same time.


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The Oil Price

Oil is another common feature of daily news bulletins and can be an important

indicator for some businesses in Australia

The most common reports in Australia mention the level of the “WTI” oil price in US$ per

barrel. WTI stands for West Texas Intermediate. This is a commonly used benchmark for the oil

price just as the ASX index is used for equity prices. The WTI benchmark refers to oil produced

in the USA and delivered to Cushing, Oklahoma for domestic consumption. The European oil

benchmark is the Brent oil price – which is a North Sea oil.

The global oil price is impacted by both demand and supply trends but the supply side is

probably the more influential in recent years. Demand for oil from developed economies has

been flat to slightly negative for some time now (more fuel efficient cars, switching to other

energy sources). Like many other commodities, increasing demand from China has been the

key.

Sudden rises in oil prices drive up petrol prices so can be a bit of a shock to household budgets.

A high oil price ($60 plus) is generally seen as negative for major oil importing economies like

Japan, Europe and many emerging economies. It is also a drag on industries that are big oil

consumers such as aviation and petro-chemicals. Oil producers such as the Middle East,

Mexico, Nigeria, and Russia are seen as benefiting from higher prices.

Although Australia is a net importer of oil, we are a major energy exporter (gas, coal, uranium

and some oil) and generally seen as benefiting from higher oil prices. Australia is a major

exporter of LNG which is generally related to the oil price. Most LNG sales are on long-term

contract basis for volumes but the price will vary to some extent with the oil price.


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Gold

Gold prices are often reported on daily news bulletins. It’s probably of less

relevance than in the past – iron ore and coal prices are more important to

Australia

Australia is the world’s second biggest gold exporter. Although it remains a top 5 export by

value, it is much smaller than our exports of iron ore and coal.

Gold has traditionally been seen as both a “safe haven” in times of trouble and also a hedge

against inflation. The safe haven status of gold is not as clear lately. Financial markets have

continued to trade with low volatility. While the gold price has rebounded over recent months

amid tensions between North Korea and the US, it is still relatively unchanged on a year ago.

On the inflation front, there are few if any signs of rising inflation in any of the major

economies. Rising interest rates are also seen as a threat to the gold price as gold does not offer

investors a yield. Interest rates in Europe and Japan seem locked at close to zero for some time

yet. Although the US Federal Reserve is slowly increasing rates, they are still at historically low

levels.


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Purchasing Manager’s Indices (PMIs)

PMIs are a favoured leading indicator of economic activity, and are based on very

large surveys of current conditions and decisions in businesses

These are among the most closely-watched signals of business activity by central banks,

financial markets, and business decision-makers across the world for providing timely

indicators of economic trends.

Australia has the Commonwealth Bank Manufacturing and Services PMIs, compiled by IHS

Markit, a global leader in this type of survey, and the smaller-sample AiGroup performance

indices for manufacturing, services, and construction.

The Commonwealth Bank PMI series is based on monthly surveys of more than 800 Australian

companies in the manufacturing and services sectors to quantify variables such as output, new

orders, employment, exports and prices.The AiGroup survey results are based on a rotating

sample of around 200 manufacturing companies each month.

A PMI reading above 50.0 signals growth, while those below 50.0 indicate contraction, with the

distance from 50 indicating the rate. A level of 55 or above is regarded as very strong expansion,

while 51 or 52 are positive, while anything 49.9 or below indicates a contraction in activity


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levels, and could be a warning sign.

PMIs also include sub-indices derived from questions to managers about various topics. The

Commonwealth Bank PMI contains sub-indices on new orders, backlogs of work, employment,

and output and input prices.

The Manufacturing PMI is released on the first working day of each month, whilst the Services

PMI is released on the third working day. AiGroup also releases a construction sector PMI on

the fifth working day of each month.


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Economic Growth / Gross Domestic Product (GDP)

Gross domestic product (GDP) is a key government statistic and provides a measure of a

country’s total economic activity. For example, if data shows GDP is up on the previous three

months, the economy is growing; if it is down, it is contracting. Two or more consecutive

quarters of contraction mean are considered as showing that the economy is in recession.

The ABS uses three measures to calculate GDP and in theory they all add up to the same

number. They are:

• The value of all goods and services produced – known as the output or production

measure.

• The value of the income generated from company profits and wages – known as the

income measure.


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• The value of goods and services purchased by households, government, business (in

terms of investment in machinery and buildings) and from overseas – known as the

expenditure measure.

GDP is the sum of all goods and services produced in the economy, including the service sector,

manufacturing, construction, energy, agriculture and government. The official ABS data contain

highly detailed breakdowns of spending across various products and services.


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The Australian dollar

The value of the Aussie is always highlighted in financial news. Its movements

and its outlook can have significant implications for all manner of businesses –

not just importers and exporters.

Since the Australian dollar (AUD) was floated by Treasurer Paul Keating in 1983, it has traded

as low as US$0.48 and as high as US$1.12. According to a 2016 Bank of International

Settlements report 2016, the AUD is the fifth most traded currency globally by value with daily

turnover of around US$350 billion.

The Aussie is considered as a “risk trade”. That is, the AUD tends to rise when markets are

willing to take on risk and when the world economy and geo-political situation is optimistic.

Given Australia’s large dependence on commodity exports, it tends to rise when commodity

prices are strong.

So, is a high AUD a good or bad thing?

If you are trying to sell education services to foreigners or encourage tourists to visit Australia,

then a higher AUD would be a bad thing as it makes Australia a more expensive destination.

Most Asian currencies are tied in some way to the USD making the AUD/USD exchange rate

critical for these markets. Similarly, for exporters of Australian wine or agricultural products, a

higher AUD makes their products less attractive to overseas buyers.

On the other hand, given the link to commodity prices, a strong AUD usually suggests good

conditions for our major commodity exports. For Australian mining exporters, almost all of

their output is priced in US dollars on the global market (iron ore, coal, gold etc). To the extent

that high commodity prices lead to a higher level of the AUD, this offsets some of the gains they

would make from the higher prices. On the other side, a falling AUD helps to offset the lower

USD commodity prices they face in tougher times. The AUD is a very important shock absorber

for the Australian economy.

For businesses purchasing stock or services from offshore, a higher AUD helps their purchasing

power and can lower input costs (for instance imported cars or clothing should be cheaper). If


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businesses are able to keep these savings it should provide a boost to margins.

The corollary of this is a lower Australian dollar raises input prices for businesses that import

parts or pay for services on contracts where the price is fixed in US dollars. It also raises costs

for Australians buying goods from overseas. This can lead to price rises – inflation – in the

Australian domestic economy.

Although the value of the AUD should have limited impact on the domestic consumer (outside

of overseas holidays and perhaps buying online from offshore websites), it is often seen in

Aussie mainstream society as a confidence measure. As this chart below suggests, a higher AUD

seems to prompt people into seeing the economy as in good shape. This is a positive for

domestic spending.


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The Wage Price Index

The wage price index is published by the ABS on a quarterly basis. It has been

reaching record lows as Australia has joined other advanced economies in seeing

very weak wages growth, and it is a major talking point for economists and

businesses

The ABS produces wage price data for each state and also by broad industry group. In the most

recent release, the ABS noted that “through the year, the Private sector rise to the June quarter

2017 was 1.8%, the same rate of growth as has been recorded for the last three quarters and the

longest period of low growth so far in the series”. Businesses will tend to look at wages as a cost

and therefore low wage growth suggests costs are under control.

But executives also need to consider the other side of the equation. In Australia (and most other

major economies) low wage growth has been a factor in low consumer confidence and an

unwillingness by the consumer to spend despite low unemployment and the wealth effect of

higher house prices. The CPI for the June quarter was up by 1.9% over the year, which means


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that the average wage earner has seen no real income growth – that is they are no better off than

a year ago.

When workers do not receive wage increases (or very little) for an extended period they are

likely to feel they are falling behind – even though prices are not rising either. This will likely

put a dampener on spending thus holding back revenue available to many companies.

The RBA Governor recently pointed to “the unusually slow growth in nominal and real wages.

Over the past four years, the increase in average hourly earnings has been the slowest since at

least the mid 1960s”. The Governor noted this was “putting a strain on household budgets”.


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Conclusion

Economic data provides a guide to what is happening outside a business in the broader world. It

is essential that executives are familiar with the key data releases and the signals they are

sending. An understanding of the data and what its impact might be on their own industry can

help in planning and capital allocation decisions. Knowing what to look out for and what it says

can keep executives on top of broader economic developments in Australia and globally. For a

trade-exposed nation like Australia, this can be the difference between success and failure.

Knowing if an economic signal is likely to have a positive or negative effect on a business allows

leaders to make better decisions. Data that might be positive for one company (such as a higher

Australian dollar) could have a negative impact on others.

What the economic data cannot do is help businesses with their internal focus. Conditions in

the economy are important, but in today’s high-paced environment companies need to keep on

top of changing industry trends, technological change and the impact of disrupters. Businesses

need to focus on corporate structure and the need to constantly assess, reform and rejuvenate to

stay on top of a rapidly changing world. Because as companies like Google, Amazon and

Facebook have shown, great businesses are able to shape the future and change whole

industries irrespective of broader economic trends.

the economic signals report -...

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