Business Confidence

Employment continues to be poor in August

In the past, I have used the word ‘lacklustre’ to describe the labour market in Australia and this remains a fitting description.

Employment growth is well below historical averages and, recently, month on month employment change has gone negative. After digging further into ‘total employment’ growth, it’s apparent that most of the growth in total employed persons are those PT employed, not FT employed. At some point, growth in underemployment is likely to impact household income and spending. The big concern is the deterioration in FT job growth in the two key states of NSW & VIC – this is a new trend uncovered. Unemployment figures have continued to move higher and the total number of unemployed persons has now exceeded GFC highs. But one bright spot is that the rate of growth in total people unemployed has started to slow. The forward indicators mostly all suggest more of the same – a weak labour market. Stronger business confidence and slight growth in job ads may be early signs of improvement in the future.

Employment Summary (trend data)

In the month of August, total employed FT & PT all declined month on month:

Source: ABS, trend data

At the same time total unemployed persons increased by over 4k persons. Not a great combination.

The lacklustre state of the employment market is clear when you look back over the last 6 and 12 months;

Growth in PT jobs has far exceeded growth in FT jobs over both 6 and 12 month time periods

On a six month basis, the growth in total unemployed persons (+40.4k persons) has far exceeded the growth in total employed persons (+22.9k persons) 

These are not indicators of a strong employment market.

Looking back over the year (Aug 13 v Aug 12), total employed persons grew by 118k persons. That sounds like a fairly reasonable number, but it is far below the ten year average of growth in total employed persons of +224k.

One positive is that there has at least been growth in PT employment. On an annual and six month basis, growth in PT jobs has helped to pick up some of the slack. This ‘swapping’ of FT for PT employment is not unusual during a slowdown in aggregate demand – which is what we have been experiencing in Australia.

Consider the chart below – the ratio of FT to PT jobs in Australia has been falling consistently since the late 70’s. Part of that is the addition of ‘new’ jobs PT in nature and more females entering the workforce in those earlier years. But it also means that FT jobs have not been growing at the same rate as PT jobs over that time. In the late 70’s there were 5.6 FT employed persons for every PT employed person – that ratio is now 2.3:1.

Source: ABS

Looking at the same chart, but on a shorter time period (last 12 years), it’s easier to see that during the 2000’s, that the proportion of FT to PT jobs stabilised at roughly 2.5 FT employed for every one PT employed person;

Source: ABS

That ratio dropped during the GFC and has now reached new lows of 2.3 FT employed persons for every PT employed person. In other words, some FT hours were cut back to PT hours during the GFC and haven’t reverted back to pre-GFC levels. So whilst it is good that at least there is some employment growth, at some point, this growth in PT employment will have implications for household income.

Total Unemployed

The other side of the equation is total unemployed persons. There is unfortunately no good news here either – unemployment has been trending up since early 2011.

Source: ABS

Growth in unemployment spiked during the GFC in 2008/09 and rebounded, but remained at elevated levels (compared to pre GFC). The decline in total unemployed persons was likely in part to various stimulus measures. Consistent growth in unemployment since early 2011 has now resulted in a total number of unemployed persons higher than that of during the GFC.

If there is one bright spot here it’s that the rate of growth in total unemployed has started to slow down (the red line). Whilst that rate of growth is slowing, the last four months still saw +70k persons added each month to total unemployed. A slow-down could still be a precursor to a change in trend.

Hours Worked

In the month of August (v same month LY), PT hours grew by +3.3% and FT hours grew by +1.4%. Commentary in the media has suggested that rising hours is a precursor to rising employment in the next few months.

We’re currently in a situation where PT employment is growing faster than FT employment (+2.8% v +0.3% yr on yr), so it makes sense that PT hours are growing faster than FT hours.

Source: ABS

As I’ve mentioned in previous posts, there appears to be a negative correlation between FT & PT hours during slowdowns. The green circled data are the last four (4) downturns in Australia. In all of these cases, PT hours grew and FT hours declined during these downturns (not all were recessions). For a while now, I’ve been following this dataset wondering if this same trend is now playing out. But FT hours are now starting to grow faster. Does the growth in FT hours indicate future growth in FT employment? This next chart may help to answer that question – it compares the change in FT employed persons with the change in FT hours;

Source: ABS

Since 1978, both FT hours and total FT employed persons have grown at the same time. That makes sense. So it’s unusual to see FT hours starting to grow and FT employment slowing down. There are several possible explanations;

  1. Employers have cut back FT employees (too much) on the expectations of weak business conditions, resulting in existing FT employees taking on a greater workload (hours). You only need to view the NAB’s Business Confidence report to see how poor business confidence has been (but saw significant improvement in the last 2 months). Or,
  2. Demand is picking up. Existing FT employees are taking on greater workload (hence the rising hours) because of improved business conditions – leading possibly to greater demand for employment in the future. To this point, we are seeing growth in PT employment (where most of the recent employment growth has been). If businesses are unsure of future conditions, that risk may be mitigated by hiring PT employees rather than FT staff. We have seen a significant pick-up in PMI and PSI indexes during September 2013, as well as improved consumer & business confidence leading into the election. This scenario seems plausible – low interest rates appear to be fuelling further activity in real estate and some business investment and the lower Aussie dollar has likely helped some sectors in the economy. Note that the A$ has now moved higher again as a result of the US Fed NOT tapering is QE program.

There is no definitive answer at this stage. But the state by state analysis points to a recent deterioration in FT employment growth in some key states.

State by State (trend data)

The state by state data shows two things 1) employment growth is slowing in most states (not a good thing) and 2) the growth in total unemployed persons is also slowing (a good thing).

Growth of total employed persons has slowed (annual v last 6 mths) across all major states – NSW, VIC, QLD, SA, WA & ACT.

Source: ABS

The main areas of concern are the bigger states, specifically NSW & Vic.

NSW represents just on half of the entire National growth in total employed persons (NSW = +60k v Nat=+118k, annual). Growth in employment in NSW has been slowing down – on a 6mth basis growth is 0% and on a month on month basis, that figure is now -0.1%. Underlying these numbers are further concerns – most of the employment gains are being driven by PT employment. In NSW, of the +60k growth in total employed persons (or +1.7%) year on year, 41k of those were PT employed. In the last six months, this situation has worsened dramatically. Growth in Total persons employed was only +1.7k persons (or 0%), but underlying that was a decline in FT employed of -11k, which was offset by a rise in PT employed of +13k. At least there was PT employment to take its place.

This is what the trend in growth in FT v PT employment in NSW looks like over the last two years;

Source: ABS 

There has been a marked deterioration in FT employment growth in NSW since early 2013. This is important because NSW currently represents half of the National growth in employment.

A similar trend is also evident in Victoria which is the second biggest state in terms of contribution to National growth in employed persons (representing 24% of the National growth).

Source: ABS 

Whilst the trend in FT employment between Mar ’12 and early 2013 had been improving, that has now reversed. On an annual basis, the total number of employed persons in Vic grew by +29.6k persons. Of this total, PT employed was +30k and FT employed was -0.4k.

This is also the situation in SA, WA and ACT. Its worthwhile taking a quick look at WA given how important this state was to total employment growth only a short while ago;

Source: ABS 

The high back in 2012 of +60k growth in FT employed persons was the all-time high in WA. Clearly WA was punching above its weight in terms of employment growth versus its population size, hence why it was such an important state. Growth in both FT & PT employed is slowing/low in WA.

Only two markets are showing growth in FT employed persons – QLD and TAS.

The other side of the equation is unemployment. The news here is a little better – in the most recent six months, the rate of growth in unemployment is slowing down in all markets:

Source: ABS 

As I mentioned before, this slow-down in the rate of growth of total unemployed persons is a good thing. Whilst the slow-down is significant in most cases, note that unemployment is still growing. Just for context, in NSW that rate growth in total unemployed persons has slowed from 15% annual to 8% over the last six months. Thankfully that has slowed further in the month on month figures to only +1.2%, but note in the chart below, that the actual number is still on its highs (+29k Aug ’13 v Aug ’12).

The state by state trends also shows some encouraging signs;

Source: ABS 

WA, QLD & ACT are now in a down trend and WA & ACT actually recorded a decline in unemployed persons Aug v July. The latest month on month data also has the rate of growth slowing across most markets.

Putting this all together, employment growth is slowing, but unemployment growth has also started slowing;

  • FT employment growth continues to show weakness, especially the recent trend in the larger states – this is the biggest area of concern going forward
  • PT employment is growing, helping to offset the slow-down in FT employment growth

In all, this is a very weak labour market and unless there is stronger growth in FT employment, this may place further pressure on household income and spending.

The question now is whether there are any indications of a change on the horizon?

Forward Indicators

There are a number of indicators that can provide some insight as to future changes in employment – job ads, vacancies, hiring intentions and business confidence.

ANZ Job Ads

Analysis by the ABS in 2002 suggested that the ANZ job ad series leads troughs in the labour market by zero to two quarters. In Sept, job ads rose 2% month on month (compared to a fall of 2% in the prior month).

Source: ANZ 

Looking at the trend in growth, it appears that the rate of decline in job ads has slowed down. Job ads are approx. 20% below the same time last year though and this still suggests a very soft labour market. Whilst this data isn’t pointing to an improvement in labour market conditions, it’s not pointing to a further deterioration either.

ABS – Job Vacancies (6354.01)

In this series, a ‘job vacancy’ is defined as “a job available for immediate filling on the survey reference date and for which recruitment action has been taken.” (Source: ABS). This data point indicates continued weakness in the labour market – the rate of decline is -20% (year on year) and does not look to be slowing down at this stage.

Source: ABS 

Hudson Hiring Intentions – Q3 2013

The Hudson Hiring Intentions survey (permanent staff) points to continued weakness in labour market conditions. Interestingly, it seems to reflect the current status of the labour market quite well;

  • More firms keeping staffing levels “steady” (unchanged) and a decreasing number of firms wanting to grow the size of their workforce – this points to the low growth in employment that we’ve seen
  • A fairly steady number of firms looking to decrease the size of their workforce – this is consistent with a slowing in the growth of total unemployment

Source: Hudson 

NAB – Business Confidence

I think it’s also worthwhile considering the role of business confidence as a possible forward indicator of labour market conditions. In the latest month (Sept 2013), business confidence continued its somewhat strong upward trend. According to the NAB survey this is the result of recent strengthening in asset prices aided by lower interest rates and better consumer sentiment. “Fundamentally, however, it appears to reflect a reaction to the political change”. This seems to be a common theme in recent data series, so it will be interesting to see if this rise in confidence a) continues and b) results in better business conditions.

Source: NAB 

The two most important points from the survey report were:

  • The business conditions index improved, but remained negative. Improvements were driven by finance/business/property and construction
  • In light of these improvements, employment conditions remained subdued, suggesting continued weakness

From the NAB Sept Report:

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Confidence – boom or bust for Australia?

An interesting dynamic has been playing out in the Australian economy over the last 18 months. Business confidence has been falling, yet it appeared that consumers were becoming more optimistic. I wasn’t sure what to make of this.

When I studied economics we analysed national income, the balance of payments and learnt about the relationship between income, inflation, employment and the money supply. Essentially, we learnt about how the economy ‘really works’. We didn’t ignore the role of consumers or business though. My economics text made mention of the ‘animal spirits’ as one determinant of the business cycle. For the most part though, we didn’t spend much time covering that dark side of economics – how human behaviour and emotions drive decision making and how that in turn moves the economy – our animal spirits.

Enter behavioural economics (which is not a recent thing) to offer an alternative view on how the economy works. The book “Animal Spirits” (Shiller, Akerlof 2009) offers this description of the ‘animal spirits’;

“It refers to our peculiar relationship with ambiguity or uncertainty. Sometimes we are paralyzed by it. Yet at other times it refreshes and energizes us, overcoming our fears and indecision.”

Underlying our animal spirits is the concept of confidence. The dictionary definition of confidence is ‘trust’ or ‘belief’. Some economic theory is based on how consumers & business make rational decisions by engaging in rational behaviour – gathering data and making decisions on the balance of probability. Again, Shiller & Akerlof go further;

“But there is more to the notion of confidence. The very meaning of trust is that we go beyond the rational. Indeed, the truly trusting person often discards or discounts certain information. She may not even process the information that is available to her rationally; even if she has processed it rationally, she still may not act on it rationally. She acts according to what she trusts to be true.”

“In good times, people trust. They know instinctively that they will be successful. They suspend their suspicions.”

Translation – in good times, people spend. There is perceived certainty and we act with vigour. In bad times, or even just uncertain times, business and consumers tend to withdraw. The mere threat of uncertain conditions in the future is enough to put a dampener on major spending decisions. Clearly one decision has an expansionary impact on the economy, the other, a contractionary impact. This school of thought says that it is the change in the animal spirits that drives changes in behaviour and the kinds of decisions we make.

It’s not just the concept of confidence that informs our animal spirits. In their book, Akerlof & Shiller also outline corruption, fairness, the money illusion and stories as the other determinants of our animal spirits. It’s easy to think that one event, such as an interest rate cut or a budget announcement can change or shift the outlook of an entire economy. These single events can add to or subtract from the social mood, but our animal spirits will be informed by a broader range of influences. Unfortunately, this is still an emerging way of thinking about the economy and there is only a broad measure of ‘confidence’ that is tracked in the mainstream, which is what I will look at in this post.

So if confidence is a fundamental driver of the ‘animal spirits’ of decision making, what do we make of the current disparity in movement between consumer and business confidence and what does it mean for the Australian economy?

Business confidence has been falling

The NAB monthly business survey looks at current business conditions and business confidence. All measures of the business survey have been grinding lower since 2010. Capacity utilization, business conditions and business confidence continue to deteriorate, albeit not to the same extent as during the GFC. So far, this has been a slow grind down rather than a dramatic drop based on outright ‘fear’.

Source: RBA

This is not a sign of boom times for Australian business.

The latest NAB report shows little indication of any near term improvement in business activity – employment conditions, forward orders and capacity utilization were all weaker from already subdued levels.

Whilst there was an improvement in trading conditions and profitability for the month, it came at the expense of employment;

Source: NAB

The overall trend downwards is unmistakable and the components of business conditions have moved into negative territory and continue to edge closer to GFC levels.

Spare capacity has also been rising (deteriorating) and is very close to those levels recorded in the GFC. The decline in this measure has appeared to level off, if not improve somewhat, over the last 4 months;-

Source: NAB

Overall, business conditions remain difficult. A recent report by Dun & Bradstreet shows businesses coming under cash flow pressure with average business payment times rising during 2013;

“Business cash flow has slowed this year, placing further strain on a range of industries already experiencing low confidence because of weak trading activity and high operating costs.” (Source: D&B 22/05/13)

There was one thing that really jumped out in this latest NAB report and that was the dramatic decline in mining confidence;

Business Confidence by Industry (net balance) 3mth moving avg

Source: NAB

I highlight this because it is an important area of the economy. Essentially, there is rising pessimism and uncertainty regarding our biggest export industry. Declines in commodity prices (coupled with a persistently high $A), lower mining profits, uncertainty regarding future demand as a result of lower than expected growth in US, China & Europe and the impact of the transition from the investment phase to the export phase of the mining boom are having an impact on mining confidence.

It appears that we are starting to see falling mining equipment sales and profit downgrades from mining services providers as well:

  • Transfield announcing a profit downgrade and job cuts due to; “ongoing uncertainty in commodity markets resulting in delay and deferment of a range of resources infrastructure projects” (Source: AFR 21/05/13)
  • “Mining services contractors (Coffey, UGL & Worely Parsons) cut earnings guidance and announced plans to cut jobs amid project delays and cancellations” (Source: MacroBusiness 21/05/13)

This is important because mining has been a key component of business investment & capex growth, with growth in mining investment forecast to taper off this financial year:

Source: RBA

I’d also argue that mining has been an important driver of employment, retail sales and house price growth over recent years. When you dig into these numbers from the Australian Bureau of Statistics (ABS), you start to realise just how much Western Australia (as a proxy for mining generally) contributes to the growth in these indicators.

The Reserve Bank of Australia (RBA) is optimistically forecasting that other sectors will ‘step in’ to fill the gap left by mining investment. One such area is Liquefied Natural Gas (LNG). Not three days after the RBA released this forecast did Woodside cancel its $36b Browse LNG project in Australia (in order to develop the project in Canada and compete with Australia instead). Uncertainty has been created about the future size of LNG exports (and new projects in Australia) as Russia and the US announce plans to enter the North Asian market. Overall, there has been $149b in mining projects cancelled in the last year.

Are these the ‘optimistic’ conditions where business will be spending to expand? Not likely. You are already seeing non-mining capex flatten out and employment conditions weaken in an attempt to control costs & maintain profitability.

The question is how could consumer confidence be improving under these conditions? What happens to business conditions when, or if, consumer confidence falls? We might not have to wait long for that answer…

Consumer confidence back in negative territory

When I started writing this post the Westpac Melbourne Institute Consumer Sentiment Index for May had not yet been released. As of April 2013, the trend upwards in consumer confidence was still broadly intact, despite being slightly lower in the month of April. The Roy Morgan data though, showed consumer confidence moving lower. I was going to write about how long it would take before consumer sentiment started to falter, especially on the back of continued difficult business trading conditions, leading to further cuts in employment (as we saw above). Well, the May numbers are out and the results were poor. The consumer sentiment index moved back into negative territory, dropping -7.3 pts to 97.6, only just above the reading for the same month last year (95.28). Anything below 100 represents more pessimists over optimists.

The index is based on a survey of over 1,200 Australian households, which reflect consumers’ evaluations of their household financial situation over the past year and the coming year, anticipated economic conditions over the coming year and the next five years, and buying conditions for major household items.

Source: Westpac, Melbourne Institute May 2013

The truth is that we will need to see how this plays out over the next several months in order to ascertain whether it is a major trend change.

I’d like to look at the trend leading up to the May 2013 data because it will help to understand what has been driving the shifts in consumer sentiment.

In late 2008/early 2009, the drop in consumer sentiment during the on-set of the GFC shows just how fearful consumers had become and it was showing up in lower consumer spending. The government moved quickly to ‘restore confidence’ through stimulus payments and a doubling of the First Home Buyers (FHB) grant. It’s interesting just how quickly consumer confidence bounced back – not quite to all-time highs (which was in January 2005 at 127.67), but close. Recall that the messages in the press were all about how Australia avoided the worst of the GFC. But ever since that rebound, sentiment started drifting off until the pessimists outnumbered the optimists again (early 2011). Up until this point, business & consumer confidence had been moving in a similar direction. From August 2011, the two start to move in opposite directions.

So what made consumer sentiment turn upward in Aug 2011? Here is the data on a shorter time period from June 2011 until May 2013;

Source: www.tradingeconomics.com

From a low of 89 in August 2011, sentiment had moved up to 97 by October 2011. At first I thought it had to be interest rate reductions. But the first interest rate cut in this current cycle of cuts didn’t occur until November 2011. Was it as simple as the promise of rate cuts? It was after all the period of time when the RBA shifted its policy stance from contractionary to expansionary.

I mentioned earlier that I doubted that one event alone would turn the tide. What else was happening during 2011?

  • Employment growth was starting to slow – it had been growing by between 200k and 300k.
  • House prices were drifting off again after the FHB-fuelled rebound. The September 2011 qtr recorded the second highest post GFC fall in % terms (ABS) – but that wouldn’t have been known until October or November when that data was released. This could have in fact spurred confidence in some sectors (investors) – real estate prices coming down, together with the RBA making noise about rate cuts. Remember that our real estate market didn’t ‘crash’ during the GFC, so the ‘story’ of our economy about how real estate is always a winning trade was still in place.
  • Retail sale growth was low, but wasn’t getting worse.
  • Mining was peaking – the iron ore price was only just off its peak, at around $170/t.
  • $A remained strong – the full brunt of that was only just starting to be felt by business. I recall some media interpretation of a strong $A as a sign of strength of our economy (that others had faith in our economy).
  • Globally, the Euro crisis started to rear its ugly head and that only got worse into the latter part of 2011.
  • QE2 had ended mid 2011 and the US stock market was reacting negatively. The Aussie stock market had already started to turn down as well.

Despite the lack-lustre news, consumer confidence started to improve from September 2011. Note that none of the points above address what the social mood was at that time in Australia.

After a pull-back in early 2012, confidence continued to improve, unlike business confidence. Consumers had become more positive about their financial situation. This appeared to manifest itself in retail sales growth, growth in housing finance (albeit low), growth in personal credit (now back up to zero %) and a savings rate that remained at 10% of GDP (spending rather than increasing savings).

But this ‘improvement’ in confidence did not translate into improvement in business performance or confidence, as you might expect. That is because I think this level of consumer confidence was (is) shaky at best.

This is the first reason why;-

Source: RBA

Households still hold high amounts of debt. This could be a source of nervousness in a real estate market that is no longer powering upwards as it had been for so many years. But as interest rates decline, household finances look a little better. There is no crisis, just caution and maybe a little bit of hope.

The second reason why I think confidence was/is shaky at best is that, as I mentioned earlier, WA was a key driver in the improvement across most metrics of the economy post GFC. A high rate of growth in employment, retail sales or housing prices could easily be tracked back to WA (or mining). In most other states (Vic, QLD, TAS & SA), I would argue that consumers were (are) in fact quite uncertain. Maybe we’ve hit a tipping point now that mining has come off the boil;-

Source: RBA

The unemployment rate has been trending higher in most states for a while now – Vic, QLD, TAS & SA. The unemployment (& employment) situation in NSW has not been as bad. But the situation in WA has turned – unemployment is rising and employment growth is slowing.

The Roy Morgan consumer confidence report claims that consumer sentiment started to move lower post the federal budget in May. That could have tipped the scales as well – consumers received less as a result of that budget. The message was all about tightening. This is against the backdrop of an election whereby both parties are talking austerity for the federal budget. I don’t want get into a discussion about the federal election in this post, but I will say that I doubt it will add to a sense of hope or optimism in Australia (the outcome is a foregone conclusion right?). There is a bumper sticker making its way around that seems to sum up the election quite well:

“Voting for Tony Abbott because you hate Julia Gillard is like eating shit because you hate spinach”

So what are the implications if consumer confidence continues to decline?

  • Larger value purchases may be put off – real estate, cars, major renovations. This would have implications for credit growth (already at historical lows), house prices and construction etc.
  • Higher growth in the savings rate
  • Lower discretionary spending – resulting in further pressure on sales/income for business, placing continued pressure on margins and employment.
  • Paying down of debt – an alternative use of disposable income
  • Shift into less risky assets – taking money out of the stock market
  • A shift in social mood towards uncertainty, even greater fear about things such as employment stability. I would already argue that our business media headlines are starting to be tainted with some ‘doom and gloom’ (maybe it’s just what I read).

This all of course has a flow on effect into the broader economy.

Based on current business confidence levels, we are seeing business retreat. The last few years have seen difficult trading conditions, despite what appeared to be improving consumer confidence. For the most part, consumer optimists started to outweigh the pessimists. But the latest consumer confidence numbers (May 2013) show this trend reversing sharply – if this continues, (that is a big ‘if’) then another driver of spending and activity in the economy may retreat. This could have major implications for the economy, specifically housing, finance and discretionary spending.