Latest NewsRecord Lift in Confidence:Wednesday, 07 September 2016

Consumer sentiment; Labour Price Index

• Consumer confidence rose for the third straight month in August. The lift in confidence over the past three months has been the strongest since the survey began in 1973.
• Wages rose by 0.8 per cent in the June quarter, matching similar growth in the March quarter. Wages are up 3.8 per cent on a year ago – the slowest growth in almost three years.
• Wages have risen 25 per cent over the past five years, outpacing a 16 per cent lift in consumer prices. The Australian economy has its mojo back – although some may say it never lost it in the first place. While consumers and businesses in other parts of the globe are despondent, Australians are almost euphoric about their finances and the outlook for the economy.
• Aussie consumers are markedly more confident, and with good reason. The sharemarket is recovering, house prices are rising again, interest rates are at generational lows and the job market is nowhere near as bad as earlier feared. The ending of the global financial crisis has meant that consumers can once again focus on their finances – and most people like what they see. Government grants, tax cuts, super-low interest rates and real wage gains are all working their magic in lifting household incomes.
• If it was unbridled optimism, then there would be reason for concerns. But the simple fact is that Aussie consumers have every reason to feel chipper.
• Those people that fret that consumer optimism and spending will deflate later in the year need to think again. Consumers are holding onto their jobs, massive refinancing of loans is serving to lift incomes and debt repayments remain historically low. It is the level of interest rates that matters, serving to support incomes and spending until early 2010.

What do the figures show?

Wages are growing at a Goldilocks pace – not too hot, not too cold, in fact just right. Wages are growing at a faster pace than prices, giving consumers extra spending power. In fact wages have lifted by 25 per cent over the past five years while prices have increased by 16 per cent. But the wage bill is certainly not a problem for businesses given that wages are growing at the slowest pace in almost three years.

• The index of consumer sentiment rose by 4.0 points or 3.7 per cent to 113.4 in August. The sentiment index is now solidly above the long-run average of 101.6. The confidence index has soared 22 per cent over the past three months – the biggest gain for an equivalent period since the index started in 1973.
• The current conditions index rose by 1.8 per cent, while the expectations index rose by 4.8 per cent.
• All of the five components of the index rose in August.
• The estimate of family finances compared with a year ago rose by 1.3 per cent;
• The estimate of family finances over the next year lifted 3.3 per cent;
• Economic conditions over the next 12 months rose by 11.2 per cent;
• The measure of economic conditions over the next 5 years rose by 0.9 per cent; and
• The measure on whether it was a good time to buy a major household item rose by 2.2 per cent.
• The wage price index rose by 0.8 per cent in the June quarter, matching a similar increase in the March quarter. Annual wage growth eased from 4.2 per cent to 3.8 per cent – the slowest growth in almost three years (September quarter 2006).
• In original terms, annual wage growth was put at 3.7 per cent. Annual wage growth has held broadly around 4.0 per cent since the beginning of 2005. Including bonuses wages rose 0.7 per cent (3.9 per cent annual).
• Private sector wages rose by 0.8 per cent in the June quarter while public sector wages rose 1.0 per cent. Compared with a year earlier, private wages were up 3.5 per cent while public sector wages rose 4.5 per cent.
• Industries with fastest annual wage growth: Electricity, gas and water supply (up 4.6 per cent), Government administration & defence and Education (both up 4.5 per cent).
• Industries with slowest annual wage growth: Manufacturing (up 2.7 per cent), Communication services (up 3.0 per cent) and Finance & insurance (up 3.1 per cent).

What is the importance of the economic data?

Annual wage growth across States & Territories: NSW, 3.6 per cent; Victoria, 3.4 per cent; Queensland, 4.1 per cent; South Australia, 3.6 per cent; Western Australia, 4.6 per cent; Tasmania, 4.3 per cent; Northern Territory, 3.8per cent; and ACT, 4.1 per cent.

• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: "The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since."
• Roy Morgan also conducts a survey of consumer confidence. Both surveys are aggregated from responses to questions on the current and likely future state of family finances, current and likely future state of the economy and whether it is a good time to buy a major household item. Confident consumers may be more inclined to spend, especially on major items.
• What are the implications for interest rates and investors? The Labour Price Index has been compiled since September quarter 1997 and measures quarterly changes in wage and salary costs for employees. The index is based on a representative sample of employees, and includes measures of non-wage costs including superannuation, payroll tax, public holiday and workers compensation. The Labour Price Index is useful in measuring wage pressures in the economy. While strong growth in wages would boost domestic spending, it could also serve to lift employer costs and prices and add to economy-wide inflationary pressures. The labour price index is a measure of hourly pay rates (excluding bonuses).
• Consumers are confident and their finances are in good shape. The bottom line is that consumers will keep spending in coming months, boosting prospects for retailers.

Source Craig James, Chief Economist, CommSec