Business conditions return to pre-GFC levels

"We continue to be pleasantly surprised by just how upbeat the business sector is, given the context of a fairly beleaguered household sector that has been weighed down by limited wages growth and record levels of debt."

These are the printed words of NAB chief economist, Alan Oster, contained in the just-released NAB monthly business survey for June.

I concur that it's nothing but a pleasant surprise. How could one not be? The latest NAB survey showed that business conditions surged from +11 in May to a reading of +15 in June. This is the highest reading since January 2008 (pre-GFC) boosted by increased profitability (to 15 in June from 10 in May) and trading conditions/sales (to 21 from 15).

Profitability I could understand because labour costs - businesses' biggest expenditure - "remains subdued". Though as NAB reports, it "has been trending higher". I guess there's no way but up with the ABS' measure of wages growing at a record low 1.9% in the March quarter.

But upbeat trading/sales conditions? Certainly, the latest retail sales report showed annual retail spending growth accelerated to 3.8% in May from 3.1% in the previous month. But back in January 2008 when business conditions were this buoyant, retail spending grew by 6.9% for a 12-month average growth of 7.6%.

The slower rate of growth in retail spending is hardly surprising given stagnant wages growth, high household indebtedness - according to RBA estimates, household debt-to-income ratio has risen to an all-time high of 189% -- and weak consumer confidence, underscored by the just-released Westpac-Melbourne Institute index of consumer sentiment.

While consumer confidence improved to 96.6 in July from 96.2 in June, it remained at levels where pessimists are much more than optimists (100 being neutral) for the eight straight month.

But back to the NAB survey. Rising business conditions and business confidence (up to +9 in June from +8 in May) leads improvement in consumer confidence as buoyant business conditions and more optimistic businesses increase expenditures on plant & equipment and on staff hiring and presumably offering higher wages

Leading indicators in the recent NAB survey provide an optimistic outlook with the forward orders component rising to a reading of 4 in June from 3 in the previous month; exports increasing to 2 from 0 and stocks being replenished (up to 5 from 3 in May) and "capital expenditure rebounding".

This is consistent with the Australian Industry Group's (AiG) performance indices reports that showed the manufacturing (up 0.2 to 55.0 in June), services (3.3 to 54.8) and construction (down 0.7 to 56.0) sectors in solid expansion territory.

Read more: business conditionsNABbusiness confidenceAlan OsterAustralian Industry GroupWestpac-Melbourne Institute
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