US Unemployment drops - Down 0.3% to 9.7%

Go the Fed! Under intense pressure, Ben Bernanke has been able to create some decent numbers regarding the employment situation.

A reduction of 0.3% isn't too bad in the situation today. However, there were a couple of early indicators that the employment situation in the US was starting to improve.

Firstly, Labour Force Productivity was up (including an increase in hours worked). Labour Force productivity is the Output/no of hours worked. Traditionally, during a downturn, productivity goes up naturally as people are laid off. Hours worked decreases because of the layoffs causing the increase. However in the most recent figures, hours worked increased as well as the productivity. This meant that people were starting to hire again.

Secondly, we have had a couple of quarters of economic growth. Unemployment is a trailing indicator of economic growth (i.e it follows growth, not precedes it). The reasons for this is due to the participation rate increasing when growth increases (people re-enter the workforce and are recorded in the unemployment stats, causing a bump in numbers) and the productivity increases (employers try to deal with increased demand with existing employees initially rather than hire).

Is Sydney Housing Overpriced?

There has been a lot of articles about the high price of Sydney housing and how we are in the middle of an asset bubble, comparable to Japan in the 80's.

One definition of an asset bubble is asset prices increasing at far greater rates than the CPI (or rate of inflation). So, using the latest stats from the ABS, I have charted the percentage changes in the Sydney housing price index from the quarter to the corresponding quarter of the previous year Vs the Sydney CPI index percentage changes from the quarter to the corresponding quarter of the previous year. I ended up with the following graph from March 2003 to December 2009 (the only stats available)

So definitely the Sydney House Prices have been more volatile than the CPI changes, but definitely not greater. In fact, if you calculate the average house price change, it equals to 3.1%. This compares extremely well with the average Sydney CPI change of 2.7%

Melbourne on the other hand is a different kettle of fish. See the graph below

Melbourne Housing Price has increased at an average rate of 8.7% every year Vs the Melbourne CPI increasing at 2.7% Close to a bubble there I believe.

Retail figures for Dec '09 : -0.7% seasonably adjusted

Maybe the Reserve had this data before the Interest rate decision. Reduction of retail turnover in price was -0.7% (However it did increase 1.1% in volume terms). These were both in seasonably adjusted terms.
Not great news for the economy. Household Consumption makes up around 52% of GDP (including the government, it increases to 70%) so impacts to retail figures affect the GDP quite dramatically
Speaking of which, here are the other factors affecting the GDP
Federal Government spending = 6.4% of GDP (defence is 1.4%)
State and Local Government Spending = 10.1% of GDP
Private Fixed Capital Spending = 23% of GDP
Public Corporations Capital Spending = 1.9% of GDP
Government Capital Spending = 5% of GDP
Exports = 19% of GDP
Imports = 20 % of GDP
Net Exports = (-1%) of GDP

Shock Horror! - Reserve Bank keeps rates at 3.75%

Well it appears no one can pick the Reserve Banks Intentions. Will be interesting to see the minutes when they are released in a couple of weeks.

All the data seemed to lean towards an increase in rates (data that has been reported here)
US GDP up in December: +1.4% for the quarter
Aus CPI up in December: +2.1%
Aus PPI down in December: -1.5%
Car sales up in December: +3.3%
House Price Index up in December: +5.2% in the quarter, +13.6% over the year.

The only factors that went against the increase was the PPI going down and the CPI being moderate. In fact, using the preferred measures of the weighted mean (down 0.1%) and trimmed mean (no change) means that inflation was obviously not enough to excite the mandarins at the Reserve.
Also the fact that the big banks increased their rates higher than the Reserve bank change seemed to stay the Reserves hand. For example, Westpac increased its standard variable mortgage rates by 0.45% (as opposed to the rise of 0.25 on the cash rate by the Reserve). This might have given the reserve pause. Indeed in the press release about the non change, the Governor of the Reserve Bank alluded to this commercial bank action. From the rba website

"With the risk of serious economic contraction in Australia having passed, the Board had moved at recent meetings to lessen the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point. Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being."

Thanks Westpac!

US GDP data - Increase of 5.7% over December quarter...or is it?

GDP figures for the US came out today. They recorded an increase of 5.7% in Real GDP over the December Quarter (Annualised). While this is definitely cause for celebration, statistically it is a bit dodgy.

The Australia ABS does not annualised its GDP figures. The quarterly change in the figures is just that; they take the GDP figure for this quarter, they subtract the GDP figure from the previous quarter and then divide by the GDP from the previous quarter. So it is
(GDP(now) - GDP (previous))/GDP(previous). This produces the quarterly growth.
The US bureau of Economic Analysis however use the same formula above, but then convert it to an annual rate (by dividing by the number of months in the quarter and then multiplying by 12). This gives you the annualized rate (which will be higher than the percentage change from month to month).

So based on the ABS methodology, we have the US Real GDP growing 1.4% over the quarter. (and only 0.1% over the year to date, from December 08 to December 09). Better to be growing than contracting, but still not great numbers over the year.

Inflation up - CPI increases 2.1% over December year to end

ABS released their inflation numbers....CPI increased 0.5% over the month to produce a 2.1% rise over the year. Not a bad result....(Reserve likes to keep inflation between 2-3%) and most of the rise was in the fruit category. The reason for this was environmental...apparently weather condition resulted in some fruits having reduced harvests, thus raising prices. Pure supply and demand dynamics. Still, it is an increase.
So while I did get my prediction wrong, I think these figures are not out of control just yet.

Producer Price Inflation : -1.5% in December

The December '09 figures for the PPI came out today, showing price weakness for third stage Production of -1.5% (a very low figure). Basically this index measures the costs of materials involved in the production of goods and services. -1.5% is the lowest figure on record in 10 years. This can only be good for manufacturers, but no so good for raw material suppliers.

Also bodes well for the inflationary figure, due to be released on Wednesday of next week. As shown by the graph below, the PPI and CPI usually follow the same trend (though the CPI isn't as volatile)

Based on the PPI, I would suggest that inflation will remain constant or decrease slightly. The only danger with this prediction is that the prices of goods and services also take into account wages (or human resource cost). There have been indications in the press that wages might be on the rise again; though the trend increase was only at 0.7% over the September '09 quarter. As Wages make up a large percentage of prices, wage inflation may cause the CPI to increase.

There is also the danger that the strong Australia dollar is camouflaging some price increases. After all, from the stats, domestic prices increased by 0.3% over the year, while import prices decreased 5.2%. This import price deflation is directly proportional to the strength of the Australian dollar.

Regardless of these factors, I do believe that inflation will remain steady or reduce to just under the 1.3% presently recorded.

Car Sales up in December 09 : 3.3% for the month, 17% for the year

Sales of new automobiles have been maintained over a difficult year. Seasonally adjusted, car sales are up by 3.3% over the December month and 17.2% for the year. This growth was mainly in NSW and SA, both of which increased by 22.1% for the year. SUV's (36.7% growth over the year) and "Other Vehicles (38.6% growth over the year) lead the charge

However further investigation of the figures ensure that the growth is mainly coming through SUV's and "Other Vehicles" (which include commercial trucks, vans etc). This can be tied to the government's stimulus 50% tax rebate for plant and vehicles that was implimented to hold up business investment. By contrast, passenger cars have been growing at a much smaller rate over the years (decreased 1.6% in december, increase of 3% over the year). But this is an ongoing trend over the years. Check out the graph below detailing changes in the purchase of automobiles over the last 20 years

Productivity Vs Production

Kevin Rudd, Prime Minister of Australia, recently made a comment saying that Australia's Productivity had to increase to ensure economic growth increased with a gradually aging population. But it appears many of the journalists have misread what productivity is.

Firstly, Productivity is defined economically as GDP per hour worked. So it involves making the most effective use of each labour hour. (i.e increased hours of work or employment doesn't necessarily result in greater productivity...in fact it can lead to the direct reverse). Production is just the growth in GDP.

Australia in recent years has been a bit mixed in it's GDP per hour worked performance. If we graph the GDP and GDP/hour from 1978 to today (using ABS figures) we get the following:-

It seems that getting anything over 1% growth in productivity is quite rare. Has only happened a few times recently; 1981, 1983, 1985, 1991, 1996-1999, 2001 and 2007. In fact Average productivity growth is only 0.4% compared to average GDP growth of 2% over the total period. In many respects, it is more dependent on growth in hours worked (which also averages 0.4% growth over the period). Here is the graph with increase in hours worked added

So to improved productivity, we need to increase the rate of GDP faster than the growth in hours worked. How to do this?

1. Prioritise industries where labour costs are low or non-labour intensive. Can be done through the use of taxation incentives.

2. Innovation of new technology/processes to reduce labour intensive industry i.e Use of robotics/supply chain technology to improve production with same workforce

3. Educate the new/existing workforce through tertiary study/training to improve efficiency across the board.

All these things are achievable. It is good that Australia is at least trying to start the debate on these issues as it will be important in the coming years. More money to the University sector and tax rebates for private sector innovation should be a good first step of this process.

US Inflation rate for Dec '09 : 2.7%

The US Department of Labour released their CPI figures on Friday. The CPI was up 0.1% for December which resulted in a full year Inflation rate of 2.7%. This was up from the previous year 2008-2009 of 0.8%.
Is this a good or bad thing? Well, like most things economic, it is a combination of both. It is good that the CPI is growing. It means that demand for certain goods is starting to increase. 2.7% is not high inflation by any means, so I'm sure the Federal Reserve will keep interest rates low in the short term.
However, if you look at the detail, we find it is mainly the Energy portion of the CPI that has resulted in the increase. Gasoline prices increased by 53% over the year....probably due to the US dollar decreasing over the year. This will improve as the US dollar increases over time. The next highest increase in the CPI was the cost of automobiles, no doubt due to the "Cash for clunkers" Government program. But if this has resulted in an increase in demand for the US car industry, then it can only be a good thing.

Effects of Government's infrastructure spending - Construction Activity Up 2.7% in Sept 09

For those wondering if the Government's infrastructure spending is still continuing, we have these figures from the ABS released yesterday regarding construction activity in September
The value of total construction over the quarter increased by 2.7% (seasonally adjusted). However it was the construction activity for the public sector (or Government) that was the real driver for this growth, up 13.2% for the quarter (or 27.4% for the year). Private sector construction activity actually went down over the quarter by 2.2% (but was still up by 13.6% for the year). So without the Government spending, the construction activity would not be as positive. The Liberals need to find a new subject to attack the government.
Another interesting stat from this release is the fact that NSW Government spends more on construction activity than any other state government. Living in NSW, my question is, what the hell are we getting for our dollars! I presume it's the Federal Government school spending program (part of the GFC stimulus package), but we are outspending the VIC government by almost 10 times. Seems a little high to the goat.
There is a sting in the tail to the overall stats however. The value of work commenced in the September quarter was down 11.8% from the June quarter. This means that the construction stats for the December quarter will not be as promising. Sell Construction/Engineering stocks now! :-)

Unemployment falls again - At 5.5% in Dec 09

Good news for the Australian Economy once again. ABS has reported that the unemployment rate fell to 5.5% in December from 5.6% in November (seasonally adjusted).
Main reasons for this reduction; an increase in part time employment for 27,900 people (taking part time employment to 3.271 million. Full time employment also increased by 7,300 people (full time aggregate employment is now at 7.6 million people).
However it is important to understand what the definition of what is being measured here. The ABS conducts a survey to 0.33% of the population of Australia (over the age of 15) and asks whether the respondent has worked for 1 hour for pay or profit in the last week (or are employed to do so). If so, they are counted as employed. Unemployed people are defined as people 15 years and over who are not employed but have actively searched for work in the past week and could start work in that reference week if required.
Full time work is defined as working over 35 hours, Part time is any employed person working less than that (so includes casuals).
Participation rate (also measured) is the percentage of the working age population (over 15) who are employed or unemployed.
So there are a few issues here. Firstly, those that have dropped out of the labour force for various reasons are not listed in the unemployment stats. However, they can be calculated by looking at the Participation rate. In December, the participation rate has remained pretty consistent. At the moment it is at 65.2%, down from the heights of 65.5% in April 2008, but still higher than the 30 year average of 62.8%. In December the male participation rate climbed 0.1% to 72.2% (long term average, 74.4%) while the female participation rate remained at 58.5% (long term average 51.6%) So it appears that generally, those that are able to work, either are or are looking.
Another thing to consider is the hours worked. One of the interesting things about the GFC was the lack of mass redundancies in Australia when companies started to feel the pinch and profits fell. Due to the flexibility of the industrial relations legislation, employers decided to reduce hours rather than remove workers. So examining the hours worked is also a good indicator of how the employment situation is going. Unfortunately, in December, the number of hours worked decreased from 1536587.4136 thousand hours to 1535554.6371 (Males gained 2000 thousand hours, females lost 3000 thousand hours) resulting in a loss of around 1 million hours in total (a very small change).
So all up, things are looking good in the employment market in Australia. Even youth unemployment (15-19) has reduced from 16.9% to 16.4% and young adult (15-24) has reduced from 11.5% to 11.3% . So not a lot wrong with the employment sector at the moment.

We are still growing - GDP up 0.2% in September 09

The ABS released their most recent National Accounts and once again, the Australian economy is growing. Woo -hoo. 0.2% seasonally adjusted. Once again, Kudos to the Rudd Government for keeping the economy in the black during a pretty difficult economic climate.

Drilling down into the figures released by the ABS, we have the major contributors to growth being:-
Government Final Consumer Expenditure (GFCE) : +0.1%
Household Final Consumer Expenditure (HFCE) : +0.4%
Private Gross Fixed Capital Expenditure (GFCE-Private) : -0.3% (+0.3 housing, -0.3 investment housing, -0.3 machinery/equipment)
Public Gross Fixed Capital Expenditure (GFCE - Public) : +0.3%
Inventories : +0.8%
GNE (without Net Exports) = 1.4%
Exports: -0.5%
Imports: +1.1%
Net exports = -1.6%
GDP growth = 1.4-1.6 = -0.2% (without Statistical Discrepancy of 0.4%)
GDP growth with statistical discrepancy = 0.2%

So what can we read from these figures. Firstly, its the house hold consumption, housing and Inventories that are saving us. Also Government investment in infrastructure (so there should be less commentary from the Liberal Party regarding stopping this infrastructure spending. There are a few dangers in this release however. The fact that our dollar is so high is making imports more competitive compared to Australian products. This is why our inventories are so high (and investment in private sector equipment is low). Domestically produced products are not being sold either here or overseas. We need the dollar to go down soon to get this balance right.
The thing that also concerns me is the statistical discrepancy. According to the ABS, this is the difference between calculating the GDP using Income measures (salaries/wages/surpluses), Expenditure measures (payments/rents etc) and Production Measures (Gross Values added by Industry). But it doesn't appear to be standard...for example, GDP using the income measure results in GDP growth of 0.9% (with no statistical discrepancy). GDP using the Production measure results in GDP growth of 0.2% (with a statistical discrepancy of -0.4%). Need more information about this as its value appears to determine whether our economy is growing or shrinking.

Housing stats - November 09

The ABS released the November Australian Housing Finance stats today. Housing in Australia seems to be one of the most discussed topics when commenting on the Australian economy. It also is one of the most misunderstood. Various commentators, the most prominent being Steve Keen from the University of Western Sydney, talk up "asset bubbles", especially in regards to housing and lament the fact that households have so much debt. In fact Steve Keen believes that debt is driving up property prices. So lets examine whether that statement is true.
Firstly, it does appear that the average mortgage loan did go up last month. According to the ABS, the average loan for housing was $279,900, up from $272,000. While only an increase of 2.9% a month; annualized, this works out to 34.5% (or 8.7% per quarter). So we are definitely taking on more debt. But the question is whether this is growing at a higher rate than the asset price securing this debt.
When looking at the ABS House price index for September 09 (a quarterly stat), we find that the house price index (a weighted index made up of property prices of property in the capital cities) increased 6.2% from September 2008 to September 2009. When we look at the average mortgage loan over that period (from today's release), we have loans increasing from $252,100 to $269,500 (an increase of 6.9%) over that same period of time. So it is true that debt in increasing faster than asset prices, but only by 0.7% a year.

If we go back further (to 2003) and chart increase in Mortgage Price Vs increase in Housing price we get the following graph.

So the increase in housing finance appears to be sustainable at this time. However, if average loans increase at a much higher rate than house prices in future, then there might be cause for concern

Australian Official Reserves

The RBA today published the monthly stats on their official reserves. Shows that Australia has $41 billion (US) in official reserves; $33 billion (US) in foreign currency, $4.9 billion (US) in SDR (or special drawing rights with the IMF), $2.8 billion (US) in Gold and the rest in IMF reserves. So all looks good for the solvency of Australia. But the size of a country's reserves don't necessarily give an indication of how well their economy is performing. According to the website of the IMF, Japan is the number two country in regards to size of central bank reserves ($1 trillion US) and their economy is experiencing negative economic growth. China is number 1 with over $2 trillion US in foreign reserves (however, is not a member of the IMF and hence isn't reported there)
What is interesting is the growth in SDR's in Australia. In August 09, Australia's value of SDRs went from $174 million to $3.9 billion. This was due to the IMF allocating more SDRs to member countries as a way of boosting global liquidity during the GFC. An SDR is a security, issued by the IMF, that can be exchanged for foreign currency (US dollars, Japanese Yen, Euro and British Pound).

International Student Visas - Going Down?

I read with interest, this article in the Age (http://www.theage.com.au/national/education/indian-student-visa-applications-fall-by-half-20100106-lubt.html), talking about a reduction in applications for student visa's in Australia; particularily from South Asian countries like India. The article states that the violence against international students in Melbourne as well as the strength of the Australian dollar has resulted in a reduction of interest from students from countries like India and Nepal
This, as it appears, is rubbish. According to this source (http://economictimes.indiatimes.com/news/news-by-industry/services/travel/visa-power/Australia-refuses-student-visa-to-33-Indians-for-fraud/articleshow/5406731.cms), 21,120 student visa's were applied for from India during July to September 2009, but a large percentage (33.2%) were rejected due to a crack down by the department on dodgy documentation supplied by applicants. The other country with a large amount of rejections was, you guessed it, Nepal (38.5% rejected).
So, lets not be sensationalist about these isolated figures. Look for the long term trend.

Mission statement

To use economic data and quality analysis to decipher the state of the Australian economy.