THE BIG PICTURE: Is the pick-up in consumer spending sustainable?

Various indicators have suggested a pickup in consumer spending across the country. And it appears that we can thank both the Reserve Bank, the Federal Government and perhaps even Greece and Spain for the firmer pace of spending.

The Reserve Bank cut interest rates in both May and June. The Federal Government provided a raft of assistance payments, in part to offset higher utilities bills caused by the carbon tax. And the renewed instability in European economies was a key factor driving global oil prices lower including the price of petrol in Australia.

The Bureau of Statistics reported that retail trade lifted 0.5% in May – the fifth straight month of gains and ending the strongest five-month period of growth in almost two years. The Reserve Bank Board minutes noted that its liaison program had recently revealed “a stronger tone” of retail spending.

The Commonwealth Bank’s Business Sales Index (BSI) has recorded stronger sales activity in recent months. And the BSI results have been confirmed in broader bank-wide data on credit card activity.

The latest data from the RBA shows that the average credit card balance lifted by $27.90 in May to $3,354.90 – the biggest increase in credit card debt for a May month in five years. The number of credit card purchases per account (10.2) was the biggest May result on record and more like a Christmas-time result. Even credit card advances rose in May – the biggest rise for a May month in four years.

The annual growth in credit card debt lifted from 0.3% to 1.4% in May. (However, the longer 12-month average growth rate eased to 0.6% – the slowest increase in two-and-a-half years.)

Other data showed that cash withdrawals made by customers at their own bank’s machines lifted almost 10% in May to record highs. The number of EFTPOS transactions lifted by almost 7% in the month to a level only exceeded by spending in Christmas last year.

So the message is that consumer spending does seem to have lifted, however, at present it represents a sharp spike in sales after a long flat or downward trend. There still remains a lot of uncertainty about what has driven consumer spending higher and whether it can be sustained. As the Reserve Bank Board debated, “one possibility… was that discounting had increased sales volumes but this meant that the growth in the value of sales had been modest.”

The week ahead

Investors look forward to the “profit reporting period” when listed companies release earnings results. Economists look forward to the “inflation reporting period” as inflation trends are important for interest rate decisions. And that inflation reporting period is now. In the US over the coming week, the housing market and broader economic activity are in focus.

In Australia, the week kicks off on Monday with the release of the latest “State of the States” report from CommSec – a quarterly assessment about how the state and territory economies are going. And on the same day the Australian Bureau of Statistics (ABS) releases data on business inflation – the Producer Price index.

Overall, we expect that finished goods prices fell by 0.5% in the June quarter after a 0.3% decline in the March quarter. That will take the annual rate of producer inflation down to just 0.1%. Simply, businesses are more worried about deflation rather than inflation in the current environment with competition, a high Aussie dollar, technology and fluky consumer spending characterising pricing decisions.

Also, on Monday, the ABS is scheduled to release an iPhone application. Statisticians and economists will be in seventh heaven!

On Tuesday, the Reserve Bank Governor steals some of the limelight away from the inflation data, delivering a speech to the Anika Foundation luncheon. No topic has been indicated as yet, but it may broadly cover recent economic developments.

On Wednesday, the ABS releases the Consumer Price Index (CPI) for the June quarter – the main measure of inflation tracked in Australia. From time to time there is pressure for a monthly inflation measure, but so far the pressure hasn’t delivered results.

Overall, we expect that the CPI rose by 0.5% in the quarter, dragging the annual rate of growth down from 1.6% to 1.1%. And excluding volatile prices like petrol and food, the underlying CPI measure may have lifted by just 0.6% in the quarter or by 1.9% over the year.

Whichever way you cut it, inflation pressures are contained. So with inflation out of the equation the key issue for the Reserve Bank is to determine whether the economy needs a further injection of stimulus at this time. The RBA Board meeting is over a fortnight away so a lot can happen in that time.

In the US, the week kicks off on Monday with the release of the June Chicago Federal Reserve index, one of the regular regional gauges that help policymakers.

On Tuesday, the “flash” estimates on production activity across the globe are issued. In the United States, Markit produces the estimates while HSBC produces a similar report for China. These gauges are still relatively new and it’s hard to know whether they are just adding “noise” or real value to economic analysis. On the same day the Federal Housing Financing Agency issues its May home price index while the Richmond Fed regional gauge is issued.

On Wednesday, the June data on new home sales is issued with economists expecting little change in sales over the past month.

On Thursday, data on durable goods orders and pending home sales are released alongside the usual weekly figures on new claims for unemployment insurance. Durable orders are tipped to rise by 0.5% with pending home sales up by 1% – more signs that the US is gradually digging its way out of trouble.

And on Friday, the first estimate of economic growth in the June quarter is released. Economists think that growth will be similar to the 1.9% annual rate posted in the March quarter – around half a per cent below what would be described as “normal” or “trend” growth. And on the same day the latest survey of consumer sentiment will be issued.

Sharemarket, interest rates, currencies & commodities

The US profit reporting season continues into the coming week. A raft of bellwether companies have already reported and now it is time for the broader gamut of companies to issue results.

On Monday, around 50 companies issue results including McDonald’s. On Tuesday around 130 companies report earnings including AT&T, Apple and Domino’s Pizza. On Wednesday around 225 companies report including Caterpillar, PepsiCo and US Airways. On Thursday around 310 companies report earnings including 3M, Exxon Mobil and And on Friday around 50 firms issue earnings results including Merck.

There is a perception that commodities are commodities, exhibiting similar price trends over time. The fallacy of the argument has been clearly illustrated over the past few weeks. The drought conditions in the US have forced prices of agricultural commodities sharply higher with corn up 53% in just over a month and wheat up 45%. The impact will spread across the globe, meaning investors must stay alert to the impact on food inflation and potential impact on social stability in developing countries as we saw back in 2007 and 2008. Australian farmers are in the box seat to benefit from stronger demand and high prices.

Craig James is chief economist at CommSec.


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