The Korean Economist Ha-Joon Chang said in 2010 “95% of economics is common sense deliberately made complicated”.
That may seem the case to many people watching the nightly news on the machinations of the stock market, news on the Aussie dollar, retail sales, employment growth, GDP and inflation. Indeed on the first Tuesday of the month in 11 of the 12 months of the year vast screen inches are dedicated to reading the RBA’s tea leaves and comments of the Governor after the Board meeting.
But as arcane as the economic argument and the fascination with individual daily data releases can be, there are data releases out there which through time have given a solid lead on the economy months in advance.
My favourite over the years has become the NAB’s Monthly and quarterly Business Survey because of the spread of the subindices it follows which track which includes;
Indeed the survey is included in the RBA’s monthly chart pack of important economic indicators.
The other side of the economic coin of course is the reactions of consumers to the economic environment around them.
The question often is however whether consumer sentiment is a leading, or predictive, indicator of retail sales and overall economic consumption – or whether it’s “coincident”, and happens at the same time as the actual changes to spending.
The data suggests that it leads slightly. It’s clear in the chart from the RBA’s recent May Statement on Monetary Policy is that it’s in the shifts in sentiment – reversals off highs and lows – where the true value of sentiment as an economic lead indicator can be found.
Take for example the current crash in consumer sentiment that has occurred around the federal budget. Most forecasters see this as a harbinger of weak consumption to come, and are deeply concerned about retail sales as the economy goes through an uncertain period.
Where the consumer sentiment and business confidence tie together is if the NAB survey shows business intentions for things such as employment stay healthy, and business conditions do likewise, then the economy is likely to weather the sentiment storm. In this scenario, employment remaining buoyant will drag consumers back to the stores in the months ahead.
While the NAB and Westpac have the two most high-profile monthly reads on business and sentiment, the weekly ANZ – Roy Morgan Consumer sentiment survey is gaining some prominence as is the Dun and Bradstreet Business survey. Both should be on the list of data to watch for investors.
But there are other lead indicators, less well known perhaps than the two headline grabbers from Westpac and the NAB which are also important inputs – or should be – into the decision matrix that drives investors forward looking analytical framework.
Take for example the purchasing manager indices, or PMIs as they are called for short. These surveys are conducted by organisations such as the Institute of Supply management (ISM) in the US, Markit, globally and the Australian Industry Group (AiG) in Australia.
At first blush surveying purchasing mangers may seem a strange level of company management to talk to, but they are important because they’ll be the first call from the CEO or CFO to cut or ramp up purchasing activity for a company.
So purchasing managers hold a unique place in the corporate structure and these surveys can convey important data about the economy.
In Australia AiG usually releases its PMI survey on the first or second business day of the month with the services sector reading – the PSI – a couple of days later. Like the NAB monthly business survey, the strength of this data is both its high frequency, coming monthly at the beginning of the month for the previous month, and also the breadth of the questions they ask.
The PMI, PSI and the joint release on Construction with the Housing Industry Association (PCI) are all great indicators on the sub sectors of the economy that help drive sentiment and in doing so give a great lead on the economy going forward.
Equally however we can never forget the Australian employment report which usually comes out on the second Thursday of the month.
Ultimately in a consumption-based economy businesses of all kinds need customers. Employment puts money in the pockets of Australians which is then spent on needs and wants of consumers. While employment is a number with a wide standard deviation around the actually number released (which means it is often only representative of the move not a true measure of the change in employment) the market focuses on it, it is reported widely online, on TV and in the press so it matters. Equally the high frequency nature of the number mitigates the chances of revisions.
Those are the key Australian data points that traders and investors alike should watch each month as an indicator of where the economy is headed.
You can follow them all on Business Insider and our Trader Diary each Monday morning will tell you what data is to be released each week so you can stay abreast of the data that matters.
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