Australian business is booming, but don't go cracking the champagne just yet

Australian businesses have never had it better, according to the latest National Australia Business (NAB) survey released today.

The survey’s conditions index — a composite indicator that measures trading activity, profitability and employment — surged by a massive 7 points to +21, leaving it at the highest level since the survey began in 1997.

On this measure, Australian businesses have not had it this good in at least two decades.

As the chart below shows, there were enormous increases recorded in trading and profitability, suggesting that demand was rampant during October.

Source: NAB

But are business conditions as strong as the NAB survey suggests?

While no one doubts that things have improved over the past year — strong growth in employment, for one, suggests they have — but the strength in the NAB survey is significantly greater than in other alternate business indicators such as the Ai Group’s measures on manufacturing, services and construction activity levels.

Like the NAB survey, they too have been around for years, and they paint a very different picture on the current momentum in the business sector.

In October, respondents in those surveys reported that activity levels improved at a slower pace than September, and well below the levels seen just a few months ago.

Services fell to 51.4, manufacturing to 51.1 and construction to 53.2, remembering that a reading over 50 indicates that perceived activity levels improved from one month earlier.

So activity levels improved according to those surveys, but at a marginal pace.

While they are constructed differently, they both look at perceived business conditions in Australia.

And while the Ai Group respondents did report an improvement in activity levels, one has to ask whether that would lead to the boom in profitability and trading conditions reported by respondents in the NAB survey?

Given the divergence, caution is understandably warranted.

That’s something that Alan Oster, Chief Economist at the NAB, stressed following the release of October report, noting that a sharp improvement in manufacturing conditions contributed to the outsized move.

“This is an extremely strong result and of itself would suggest a better than expected performance for the economy,” he said.

“However, it is unclear just how long conditions can remain at these record levels given that the result was driven by a surprise jump in manufacturing.”

Adding to the need for caution, Oster said the surveys lead indicators also softened over the month, which, along with an unchanged reading on business confidence, raised questions as to whether the bounce in the conditions index can be sustained.

“Some of the leading indicators such as forward orders — which have been giving a more accurate read on the strength of the economy — have actually softened a little in recent months,” he said.

“Less upbeat readings on business confidence may also be telling, with firms previously indicating that uncertainty around the outlook for their business is holding confidence back.”

Given softer internals in the NAB report, along with the slowdown in other business indicators, it will be interesting to see whether the NAB’s conditions index will retrace its October surge next month.

Things are undoubtedly looking better for Australian business, but it’s probably best to keep the champagne on ice, says Tom Kennedy, Economist at JP Morgan.

“Although firms’ operating conditions have obviously improved, the sectoral momentum in the survey [from] manufacturing and mining makes us think that the magnitude of the improvement is overdone and the implications for economic growth and monetary policy need to be faded,” he says.

George Tharenou, Economist at UBS, agrees with Kennedy’s assessment.

“The conditions [index] is now giving an incredibly bullish signal on the economy with a spike to a record high,” he says.

“However, it has been average or above for most of the last three years and has just not translated through to the hard data like GDP, CPI or wages.”

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.