Upbeat NAB Survey Disconnects With Data
Once again there’s a gaping difference between the picture of the economy and business conditions painted in the monthly survey from the NAB, and anecdotal reporting by media and business groups - and by the picture of a weak economy painted in the March quarter National Accounts.
For several months now the NAB monthly surveys has described a solid economy with business conditions improving to their best level in a decade or more.
Business confidence is a little more volatile (as all confidence measures are), but not where near ’slit your wrists’ levels suggested by media reports and some corporate trading updates from the ASX - especially in retailing.
The May NAB Monthly Business Survey, released yesterday, is no exception. It again pointed to an upbeat business sector, “indicating an apparent disconnect with a seemingly disheartened household sector,” according to the NAB’s economists.
Despite easing modestly in May, business conditions are still at very elevated levels, while solid trends across most states and industries are encouraging.
“Employment conditions are holding up well and are consistent with the recent improvements in employment growth reported by the ABS and suggests that we can expect solid employment growth to continue over coming months,” the NAB said in yesterday’s report.
"Business confidence meanwhile unwound, after briefly caught up with conditions in April, although remains above its long run average. How the disparity between business and household conditions resolves itself will be critical to the outlook for growth.
“We continue to expect economic growth to accelerate in H2 2017, following weather related disruptions in the first half of the year, but the longer-term outlook is less certain as important growth drivers (LNG exports, commodity prices and housing construction) begin to fade.
The details from the NAB report shows that business conditions eased slightly in May, but remain at elevated levels.
"The business conditions index fell 1 point, to +12 index points, which is well above the long-run average (+5). In contrast, business confidence is looking less buoyant, although it has remained above long-run average levels. The confidence index dropped 6 points in May, to +7 index points – compared to a long-run average of +6 for the series,“ according to the update
And the NAB’s Chief economist,Alan Oster said in the report that “The business sector is looking quite upbeat, maintaining the apparent disconnect with a rather melancholy household sector. It is good to see that the strength has been quite broad-based, and even at the state level we have seen some significant improvements in Western Australia, which signals that the worst of the mining sector drag is probably behind us”.
According to the NAB the slight easing in business conditions during May was largely driven by construction and finance/ property/ business services, but all industries are recording positive business conditions – for only the second time since 2010.
“The one patch of softness is in retail, where conditions were only neutral in trend terms, although that is unsurprising given the softer trends in the household sector. The major service industries on the other hand are still generally leading the way, although the gap is clearly closing as the underperformers lift” said Mr Oster. The mining industry has bounced back considerably in recent months, supported by elevated commodity prices.
“Profitability has remained elevated in the Survey for some time now, backed-up by solid profit outcomes in the first quarter National Accounts. Similarly, the current level of employment conditions is consistent with the recent improvements in ABS employment growth.
“That has helped to close the previous departure between the NAB and ABS measures of employment, while the NAB index suggests that we can expect more solid employment growth to continue over coming months,” Mr Oster said.
The NAB’s other leading indicators reported capacity utilisation rate rising, despite some pull-back in capital expenditure, while forward orders were steady in positive territory for the month.
“Solid outcomes from the NAB Monthly Business Survey signal a divergence in conditions between the business and household sectors of the economy,” Mr Oster pointed out
"How the disparity resolves itself will be critical to the outlook for growth. Optimists might point to solid employment conditions as providing the much needed catalyst to lift the household sector out of its current funk.
“However, significant structural headwinds still pose a hurdle that will prove difficult to overcome, keeping wages growth subdued and consumers cautious with their spending. “We continue to expect economic growth to accelerate in H2 2017, following weather related disruptions in the first half of the year, but the longer-term outlook could be less sanguine as important growth drivers (LNG exports, commodity prices and housing construction) begin to fade.
"Despite that, the RBA’s emphasis on financial stability concerns is expected to keep them on hold for the foreseeable future”, Mr Oster forecast.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.