THE BIG PICTURE: The gloss comes off

I think the constant barrage of economic data has left investors more confused rather than informed. That’s why it pays to stand back from time to time and look at the bigger picture. And once you do that, it’s clear that the economy has recently lost some of its gloss.

Let’s look at the industry surveys first. Both the construction and services sectors are going backwards according to the latest activity surveys. The NAB business conditions index also fell in the latest month as did business confidence. And while the manufacturing sector also weakened in the latest month, the gauge stands at 52.9, so only modest growth is occurring.

Next, consumer spending. Certainly spending has disappointed for some time with retail spending up just 0.2% in May to be just 1.2% higher over the year – the slowest annual growth in nine years. Consumer confidence has also slumped over the past three months to highlight just how nervous people are.

The housing sector also has hardly been flash of late. New lending has fallen in nine of the last 10 months and the number of loan commitments stands at 9-year lows. Approvals to build new homes have also slumped over the past two months – the biggest back-to-back decline in seven years. Home sales also dropped 6.4% in May while home prices are now growing at a far slower 5% annualised pace.

One area of strength is the job market with employment up in nine of the last 10 months with employees also working longer hours. The unemployment rate stands at just 5.2% and is expected to fall further during 2010 given the continued lift in new jobs being advertised on websites.

Overall, it is hardly surprising that the Reserve Bank has suggested that the cash rate will be stable for some time. And it is clear that it is the softness in our own economy, rather than Europe, that is the key reason why interest rates are on hold. Higher interest rates and the withdrawal of government stimulus are certainly restraining consumer and housing spending.

And then there is the flow of people. More Australians are travelling overseas and in-bound tourism is going backwards, taking spending power away from the economy. In fact the tourism deficit is the biggest on record (34- years). And the number of migrants coming to Australia is down by 90,000 (on an annual basis) compared with a year ago. The combined effect is to remove $2 billion of retail spending from the economy.

The week ahead

If ever a week was to be described as “normal” it would be the week ahead. Both in Australia and the US there is a solid batch of economic indicators to be released – the data load being neither paltry nor excessive.

In Australia, housing finance and credit card lending figures are issued on Monday with lending finance and the NAB business survey on Tuesday. On Wednesday, consumer confidence data and Federal Treasury’s ‘Modellers Database’ are expected to be issued – the latter containing the latest estimates of private sector wealth. Detailed labour force figures are slated for release on Thursday together with car sales.

The housing finance data should kick off the week in positive fashion with the number of loans by owneroccupiers expected to have lifted by 1% in May. The increase is only modest, but with the number of loans at 9-year lows, any gain has got to be positive.

It’s also possible that readings of business and consumer confidence may have bounced a touch in the latest month after recent weakness. Stable interest rates and resolution of the resource tax debate are positives although the health of the so-called ‘advanced’ economies remains a major worry together with the soggy
sharemarket. Business profits also remain under pressure due to the perceived need to discount goods to entice consumers to spend.

The other indicator to watch is new car sales. At face value the June result looked healthy with industry data showing car sales were at record highs in the month. But once adjusting for seasonal factors the result looks less impressive. We are tipping a 3% fall in sales in the month.

Still with the job market in good shape and car affordability at the best levels since the mid 1970s, the outlook remains favourable, pointing to sales around a million units this year.

Turning to the US, there is a bevy of ‘top shelf’ indicators to be released over the week. On Tuesday, the latest trade data is issued alongside the monthly Treasury budget numbers. On Wednesday, retail sales and the minutes of the last Federal Reserve meeting are released. Producer prices and industrial production data are out on Thursday with consumer prices and consumer sentiment rounding out the week on Friday.

Main interest is in the ‘activity’ readings, namely retail sales and production. And while consensus forecasts point to soft results, that may actually prove a blessing – that is, the bar is set quite low. Economists expect flat nonauto retail sales in June while production is tipped to rise by just 0.1 per cent.

Consumer sentiment will also be in focus, but yet again a decline is tipped with the gauge seen easing from 76 to 74 in July. The Empire State manufacturing index and Philadelphia Fed index will also be scrutinised on Thursday. Inflation indicators are unlikely to trouble investors over the week with core rates of producer and consumer prices both tipped to have lifted 0.1% in June.

The other focal point over the week is Chinese GDP and other key monthly data, due for release next Thursday.

Sharemarket

The US earnings or profit-reporting season kicks off on Monday. As is traditionally the case, Alcoa gets proceedings underway with earnings of 14 cents per share tipped for the second quarter, far better than the 26 cent loss a year ago. Other companies that are expected to report over the week include Intel and YUM! Brands on Tuesday, JP Morgan Chase, Advanced Micro Devices and Google on Thursday with Bank of America, Citigroup and General Electric on Friday.

In aggregate, analysts surveyed by Thomson Reuters tip S&P 500 companies to report a 27% annual lift in profits, with materials and energy companies expected to do best while profits in the telecom and utilities sectors are expected to be slightly down on a year ago.

Interest rates, currencies & commodities

One way of tracking activity in the coal sector (especially thermal coal) is to monitor the number of ships waiting to load off the port of Newcastle. At the end of June the queue had lengthened to 61 – the highest level in three years. But one complication to tracking this queue is the fact that a new vessel arrival system is being implemented, designed to reduce the number of ships waiting at anchor.

The new system is designed to regulate the flow of ships moving through the port. Still, even with the new terminology, the port authorities advise that 12 vessels were anchored off port as at July 5 with another 53 in transit. Our commodity research team note that thermal coal demand is holding up but the increase in the ship queue may also reflect ship owners competing for ‘spot’ orders in response to excess freight capacity at the moment.

A broader measure of demand for dry commodities like coal, iron ore and grain is the Baltic Exchange’s main sea freight index, the Baltic Dry index. Some investors have been concerned about the sharp fall in the index from 4,200 in late May to around 2,100 at present. But it’s important to note that both demand and supply influences may be at work. While demand may have softened to some extent, more vessels have come into operation to match the surge in demand for raw materials in recent years. In the 17 years to mid 2002 the Baltic Dry index averaged 1,290 and was regularly between 1,000-2,000 points over the period.

Craig James is chief economist at CommSec.