Monday, June 18, 2012
My theory is we have two-track minds. Many of us are thinking gloomier than we’re acting.
As you recall, the national accounts from the Bureau of Statistics show real gross domestic product growing by a remarkable 1.3 per cent in the March quarter and a rip-roaring 4.3 per cent over the year to March.
The bureau’s latest labour force figures, for May, show employment growing by an average of 25,000 a month over the first five months of this year, with much of the growth in the ‘non-mining’ states.
I never take the initial reading of frequently revised estimates too literally. The governor of the Reserve Bank, Glenn Stevens, has noted the annual growth figure is probably inflated by a catch-up effect following the disruption to economic activity caused by the Queensland floods early last year. He’s willing to say only that the economy’s travelling at about ‘trend’ (3.25 per cent a year).
Now Dr Chris Caton, of BT Financial Group, has advanced his own theory to explain the surprisingly strong 1.3 per cent growth in the March quarter. He notes the inclusion of a leap day in the quarter - so it contained 91 days rather than the usual 90 - may have thrown out the bureau’s seasonal adjustment process.
Some components of GDP would have been adjusted for this ‘trading-day effect’, but many may not have. Sounds far fetched? Caton looked back over the five previous leap years, finding the March quarter growth figure exceeded the average rate of growth for the three preceding and three subsequent quarters in four of those years, with the excess for the five years averaging 0.46 percentage points.
But even if you accept Stevens’s judgement the economy’s growing at about trend - which I do - you’re still left saying it’s doing a lot better than implied by the gloominess of business and consumer confidence as we conventionally measure them.
NAB’s business survey for May showed business conditions (the net balance of respondents regarding last month’s trading, profitability and employment performance as good) fell to their weakest level in three years.
To put this in context, the conditions index is now 5 points below its long-term average since 1989, but nothing like as bad as it got during the global financial crisis of 2008-09, let alone the recession of the early 1990s.
The index of business confidence (how the net balance of respondents expects conditions to change in the next month) is saying something roughly similar. NAB says the survey implies GDP growth will slow to an annualised 2 per cent in the June quarter.
The Westpac-Melbourne Institute index of consumer sentiment rose a fraction in June to 96, down almost 6 per cent on a year earlier. It’s pretty low, though at nothing like the depths to which it sank in 2008-09.
The overall index can be divided into two bits, the current conditions index and the expectations index. In June the conditions index rose by 6 per cent, whereas the expectations index fell by 4 per cent. And whereas the conditions index stands at 104, the expectations index is a 90.
I’m a great believer that the mood of consumers and business people does a lot more to drive the business cycle than it suits most economists to admit (because their theory tells them little about what drives confidence and, in any case, it’s not easy to be sure what you’re measuring).
So it pains me to admit that, at present - and not for the first time - the conventional confidence indicators seem to have been bad predictors of what HAS happened in the economy, and don’t look like reliable predictors of what WILL happen.
I think there’s a gap between how people are feeling and how they’re acting. How consumers and business people feel is a function of their direct experience and what their peers are saying and doing, but also of what the media is telling them about the wider world.
They probably give a lot more weight to the former than the latter. Direct experience tells them things aren’t too bad; interest rates have dropped a long way in the past six months and, despite all the media stories, they’ve seen little in the way of job losses close to them.
On the other hand, the media are bringing them a lot of worrying news about Europe and elsewhere. It seems pretty clear this is having a big effect on how they feel. It’s less clear how much it has affected their behaviour - so far, at least.
I suspect the present mood - as opposed to present behaviour - is also affected by political sentiment. A lot of people have decided - rightly or wrongly - the economy is being badly managed.
The NAB business survey showed 47 per cent of respondents believed the May budget would have a negative effect on their business. This seems a huge overreaction to the one piece of bad news for business in the budget: the cost of a cut in the company tax rate of a mere 1 percentage point was instead being paid into the pockets of business’s customers.
And consider this: when you divide the consumer sentiment index according to federal voting intention you find the index for Labor voters stands at 119, whereas the index for (the far greater number of) Coalition voters is down to 82.
Perhaps the main thing the confidence indicators are telling us is something we already know: the Gillard government is highly unpopular with consumers and business people.