Business activity strengthened in November, jobs rose in October

The real-time data is showing healthy recovery in the Australian economy, though the Q3 GDP release next week will show a sharp contraction due to the lockdowns.  

The easing of public health restrictions, rising vaccination rates and continued declines in COVID case numbers are all supporting a recovery in economic activity. The Flash Australia Composite PMI rose to a five-month high in November, signalling an increase in the pace of economic growth. After having spent three months (July-September) in negative territory, the Composite PMI has now indicated expanding private sector activity for two consecutive months. At the same time, however, the survey also reported that businesses continue to struggle with supply chain challenges: input prices rose at a record rate in November as firms cited longer delivery times, widespread raw materials shortages and some hiring difficulties. 

Payroll jobs numbers are also consistent with the story of an ongoing recovery. Over the month from 2 October, jobs numbers are up 3.1 per cent nationwide with strong increases in the three states emerging from lockdown: the ACT (up 7.4 per cent), New South Wales (up 5.7 per cent) and Victoria (up four per cent).

Elsewhere, in what was a relatively quiet week on the Australian data front, ABS releases showed private capital expenditure fell 2.2 per cent over the September quarter, roughly in line with expectations, while total construction work done fell by a smaller than expected 0.3 per cent over the same quarter as the impact of lockdowns and construction sector shutdowns turned out to have been smaller than feared. Both results are inputs into next week’s third quarter GDP release, which is expected to show a sharp quarterly drop due to the impact of the East Coast lockdowns.

We cover the state of the recovery and look forward to next week’s GDP release in this week’s Dismal Science podcast, along with discussions covering the leadership of the US Fed, the recent drawdown on the US Strategic Petroleum Reserve and Decentralised Autonomous Organisations (DAOs).

This week’s linkage roundup includes the ABS on the growth performance of the states and on Australia’s energy balance, why high vacancy rates mightn’t translate into rapid Australian wage growth, the pandemic and the Australian housing market, the post-pandemic global labour market, what should the US Fed do now, how to explain the inexorable rise of big government, trade and connectivity in the Asia-Pacific, the OECD on inequality and Asimov’s Foundation series.

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What I’ve been following in Australia . . .

What happened:

The IHS Markit Flash Australia Composite PMI rose to an index level of 55 in November 2021 from 52.1 in October.

The Flash Services PMI rose from 51.8 in October to 55 in November while the Flash Manufacturing PMI rose from 58.2 to 59.5 over the same period.

Why it matters:

The Flash Composite, Services and Manufacturing PMIs all rose to five-month highs in November, indicating that the pace of Australian business activity accelerated over the month. That in turn is consistent with the story that the easing of public health restrictions, falling case numbers and high vaccination rates are contributing to a robust economic recovery.

On the downside, the survey details also suggest that supply chain issues continue to be a problem, with lengthening delivery times, widespread shortages and higher input prices. Input prices rose at a survey record rate in November for the Composite PMI while for the Manufacturing PMI suppliers’ delivery times also lengthened at a record rate. The survey results also highlight a faster pace of hiring along with some reports of difficulty in securing workers.

What happened:

According to the ABS, the number of payroll jobs rose 1.4 per cent over the fortnight to 30 October 2021 after rising by 1.7 per cent over the previous two weeks.

By state, payroll jobs over the latest fortnight of data rose everywhere except Queensland (where they were flat), with the largest increases  a 4.4 per cent rise in the ACT, a 2.6 per cent increase in Victoria and a 1.9 per cent rise in New South Wales.

Why it matters:

The impact of easing of lockdowns and better public health news is evident in a 3.1 per cent nationwide gain in payroll jobs over the month since 2 October. Job increases over the month were concentrated in the states where lockdowns have been eased, with New South Wales (up 5.7 per cent over the month), Victoria (up four per cent) and the ACT (up 7.4 per cent) driving the result.

Job numbers in New South Wales are now just 0.1 per cent below their level at the end of June this year, before the latest lockdown. The job gaps in Victoria (0.4 per cent) and the ACT (1.7 per cent) are larger, but still well-down relative to the position in late August and early September.

What happened:

The ANZ-Roy Morgan Consumer Confidence Index rose 1.3 per cent last week.

The subindices painted a mostly positive picture: there were increases for ‘future economic conditions’ (up 4.9 per cent), ‘time to buy a major household item’ (up 2.1 per cent) and ‘current financial conditions’ (up 1.6 per cent) while ‘future financial conditions’ were unchanged. But ‘current economic conditions’ fell 1.7 per cent.

Inflation expectations eased last week, dropping 0.4 percentage points to 4.6 per cent.

Why it matters:

Consumer confidence increased over the past week as Victoria eased all COVID restrictions for the fully vaccinated, with confidence rising 4.9 per cent in the state. At the same time, inflation expectations fell back to their lowest weekly result since the week ending 12 September this year.

What happened:

The ABS reported that in the September quarter of this year, the volume of total new private capital expenditure fell 2.2 per cent over the quarter (seasonally adjusted) but was still up 12.9 per cent over the same quarter in 2020.

Spending on building and structures fell 0.2 per cent over the quarter but rose nine per cent over the year while spending on equipment, plant and machinery fell 4.1 per cent over the quarter and rose 17.4 per cent in annual terms.

By industry, mining capex rose 1.2 per cent over the quarter while non-mining fell 3.4 per cent.

By state, capex was down sharply over the quarter in the ACT (a 16.7 per cent fall) and New South Wales (down 8.5 per cent) and also dropped in Victoria (down 1.6 per cent). There were more modest declines in Queensland (down 0.7 per cent) and Western Australia (down 0.3 per cent) while there were quarterly increases in Tasmania (a 25.8 per cent jump), South Australia (up 4.2 per cent) and the Northern Territory (up 2.3 per cent).

The ABS release also included data on expected capex. Estimate 4 for 2021-22 was $138.6 billion, which was up 8.7 per cent from Estimate 3 and 19.7 per cent higher than Estimate 4 in 2020-21.

Estimate 4 for mining investment was up 5.1 per cent from Estimate 3 and 14.1 per cent higher than Estimate 4 last year, while Estimate 4 for non-mining investment was up 10.3 per cent from Estimate 3 and 22.3 per cent from Estimate 4 in 2020-21.

Why it matters:

Private capital expenditure was projected to be weak in the third quarter given the impact of state lockdowns – the market consensus had been for a two per cent drop – so the actual decline was largely in line with expectations, with spending dropping in the locked down states in general and in New South Wales and the ACT in particular.

More positively, the results on expected investment point to a significant increase in private capex for 2021-22. That’s in line with the rebound in business activity noted above as well as the stronger readings from business confidence surveys seen in September and October.

What happened:

The ABS said that total construction work done fell 0.3 per cent in the September quarter of this year (seasonally adjusted) but was still up 3.5 per cent over the year from Q3:2020. Building work done fell 0.9 per cent quarter-on-quarter but was up 3.2 per cent year-on-year while engineering work done rose in both quarterly (up 0.4 per cent) and annual (up four per cent) terms.

The decline in the value of building work done was driven by a drop in non-residential work done, which fell 2.2 per cent over the quarter and was down 2.4 per cent in annual terms. Residential work done was unchanged over the quarter and seven per cent higher over the year.

By state and territory, total construction work done fell over the quarter in New South Wales (down 8.1 per cent), Western Australia (down 3.2 per cent) and the ACT (a 15.5 per cent slump) but rose elsewhere, with gains of more than five per cent in Victoria and Queensland and an 11.4 per cent rise in the Northern Territory.

Why it matters:

The median forecast had been for a sharp 2.9 per cent quarterly contraction in construction work done over the September quarter, reflecting the anticipated impact of lockdowns in New South Wales, Victoria and the ACT in general, and the shutdowns for the industry in New South Wales (in August) and Victoria (in September) in particular. In the event, the outcome was a much shallower decline, and although construction work did fall in New South Wales and the ACT, Victoria recorded a quarterly increase despite the lockdown (perhaps a survey timing issue?).

Linkage . . .

• Last Friday, the ABS released State Accounts for 2020-21. While the Australian economy overall grew 1.5 per cent in 2020-21, growth in gross state product (GSP) ranged from contractions in the Northern Territory (down 0.5 per cent) and Victoria (down 0.4 per cent) through moderate growth in New South Wales (up 1.4 per cent) and Queensland (up two per cent) to fairly rapid growth in Western Australia (up 2.6 per cent) and the ACT (up 2.8 per cent) and strong growth in Tasmania (up 3.8 per cent) and South Australia (up 3.9 per cent).
• The ABS Energy Account for the 2019-20 year shows energy use per household falling 5.4 per cent and industry energy intensity declining 3.6 per cent. For households, lockdowns meant increased use of electricity due to more time spent at home, but this was more than offset by reductions in petrol and diesel use due to decline in the requirement for transport.
• Grattan on coal’s rapidly declining role in the National Electricity Market.
• Jeff Borland says record job vacancies won’t automatically lead to higher wages.
• A new Parliamentary Budget Office (PBO) dashboard for fiscal projections and sustainability.
• ANZ Bluenotes on changes in the end-of-year spending behaviour of Australian households and how they might interact with the impact of the pandemic.
• The RBA’s Mario Kohler gave a speech on Australian Securities Markets Through the Pandemic. She noted that while the crisis had initially triggered sharp adjustments in security prices, the resultant period of volatility was relatively short-lived. Rises in risk premia were smaller than during the global financial crisis and lasted for a shorter duration. Her speech also looked to the future, saying that the RBA would: focus on the way that very low interest rates had triggered a search for yield, which in turn made it important to keep an eye on risk premia to see if asset prices appeared to be sensibly valued; look at the implications of the phase out of the Committed Liquidity Facility; and consider the implications of the refinancing of Term Funding Facility maturities for the bank bond market.
• NAB looks at how the pandemic influenced the Australian housing market.
• The Department of Industry’s 2021 Outlook for Selected Critical Minerals in Australia looks at the markets for rare earth elements, cobalt, graphite and vanadium.
• An FT Big Read on the post-pandemic labour market asks where did all the workers go?
• Bloomberg Businessweek says that this could be a (reverse) Volcker Moment for Fed Chair Jerome Powell: he needs to stay focused on driving up employment, even at the cost of elevated inflation readings.
• For a rather different take, see Jason Furman on what the US Federal Reserve should do now.
• Related, the Odd Lots Podcast has a good conversation with Furman on US inflation.
• An Economist magazine briefing on the seemingly inexorable rise of big government. It identifies three forces as driving the trend: (1) the incentives facing bureaucrats and politicians, aided and abetted by advances in (communications) technology; (2) the rising relative cost of services (Baumol’s ‘cost disease’) provided by the state, particularly in education and health care; and (3) the demands of voters, where ageing populations are likely to continue to drive up spending pressures on health and social care. Climate change and the energy transition look likely to be a fourth factor, particularly given many governments’ preference for regulations and subsidies over a more market-driven approach based around carbon pricing.
• UNESCAP on the outlook for goods trade in the Asia and Pacific. The section on longer-term trends in supply chains is interesting. A common thesis has been that fears about supply chain disruption due to the US-China trade war and other, earlier, shocks would likely contribute to (1) a shortening and (2) a diversification of supply chains and the expectation was that the pandemic would reinforce this change. The report finds that ‘contrary to expectations, during the COVID-19 pandemic, GVCs have actually become longer than before.’ Partly that reflected pandemic-driven closures and disruptions, however. The expectation now is that while a shortening of supply chains is still on the agenda, it may be restricted to ‘strategic sectors’ such as pharmaceuticals, communications equipment and semiconductors. For most other firms/industries, the preference appears to be for a diversification strategy to reduce single-supplier dependency, especially with regard to China, and the report points to growth in so-called ‘China+1’ strategies. Climate change and the green transition are also identified as important forces driving GVC restructuring.
• Related, the IMF says reducing trade barriers could reignite Asia’s growth engine.
• An ANU e-book on New Dimensions of Connectivity in the Asia-Pacific.
• The WSJ argues, that despite some recent big defeats around fiscal policy, some elements of Modern Monetary Theory are now accepted by much of the financial establishment.
• The OECD asks, Does inequality matter?
• Daron Acemoglu worries about the dangers of unregulated artificial intelligence.
• Finally, Zachary Carter on Asimov’s Foundation and Apple’s attempt to bring it to the screen. (I have to confess I’m another example of someone who was probably unduly influenced by the idea of psychohistory at an impressionable age…).