Wednesday, September 02, 2009

"All that worry for nothing, the economy's running hot" - Adam Carr

Adam writes:

"GDP rose +0.6% compared to the market and my expectation for +0.2%/+0.4%.

All three measures of GDP rose - expenditure up +0.7%, income and production up 0.6%.

Non-farm GDP rose by +1.1% while domestic demand was up 0.8%.

The household savings ratio rose to 4% from 2.4%.

By industry – activity fell in agriculture, mining, construction; with the strongest rises in property and business, government and recreational (over 3%q/q in each case).

All that worry for nothing - this economy is running hot.

The important number out of all the various growth measures is domestic demand (as it excludes the noise from inventories and net exports). Certainly given this noise, I would expect it was domestic demand that would matter for the RBA.

Well domestic demand shows that we’re firing on almost all cylinders – household consumption up 0.8% (broad based), business investment up 1.9% (largely engineering construction and machinery) - in fact the only real area of weakness came from non-residential and residential investment. The thing is, we know where this is headed - building approvals are up, lending is up etc. Engineering construction is still booming. So in my opinion we will be soon firing on all cylinders...

...certainly in 2010 and probably in 2H09.

Consider also that private inventories have been cut hard (taking off -0.4% from Q2 GDP) yet demand is quite resilient. This implies business has been caught unawares by stronger-then-expected demand (this quarter's lift in inventories was driven by public and farm). The problem here is that stocks are now low – and as I mentioned earlier this week – this creates an inflationary thrust. It also means at some point we could get a very strong GDP number – well over 1% as production is ramped up and private inventories stop falling – that by itself would add a lot to GDP.

Does this mean the RBA will hike in October? Not by itself. Remember that the RBA wants to wait and see whether growth will be maintained in the absence of cash handouts. There is quite a bit of data out before the October – two retail reads alone. On the basis of their rhetoric I think you'd need to see strong retail numbers, another solid equity rally and a decent run on the global data to get a hike then in my mind. Something that would show the bears on the RBA board, unequivocally, that things are good. That's certainly plausible, but I'm not expecting such one-way flow. That’s why I’m still sticking with December at this stage.

Will consumers keep spending? Today’s accounts offer mixed support. Average compensation per employee continues to moderate – not great for incomes (though good for employment), but then savings have risen. So nothing firm there. Yet as I’ve outlined before I think they will. There is still an enormous amount of policy to kick in 2H09 – it’s far from fading, and that says nothing about the confidence impact now we’re not facing Armageddon. As today's accounts show the Australian economy has been travelling very well through this global crisis/recession."