THE BIG PICTURE: Our great affordability story

This week we released a report, the CommSec 30/40/50 Project, looking at the cost of living over time. It would be wonderful if there was a central resource that recorded the price of goods over time, but it doesn’t exist; although individual companies no doubt keep an historical record of the prices charged for their goods and services over time.

The Google project to digitise newspapers has provided a resource though, enabling people to assess the cost and standard of living over time. Certainly historical data on wages and the consumer price index do exist so that people can translate the prices of goods into current day terms as well as track item affordability.

The broad findings indicate that a raft of common consumer items such as cars, clothing, travel, household goods and liquor are cheaper now than 30, 40 or even 50 years ago. And clearly if they are cheaper, they are also more affordable.

Over the past 50 years, wages have risen by 2,988% whereas prices have lifted 1,172%. Over the past 40 years wages went up 1,476% and prices are up 834%. And over the past 30 years, wages have risen by 377% while prices are up 230%.

But while many items have become cheaper or more affordable, it is also apparent that houses have become less affordable over time. Still, the hard part is to compare like for like. A home in a suburb in 2012 would be very different from the same home 30, 40 or 50 years ago. And the general improvement in consumer affordability has provided consumers with the extra dollars needed to purchase or rent homes.

The aim of the exercise was to determine whether consumers are reluctant to spend currently rather than being unable to spend. Clearly more needs to be done, such as looking at wages of different professions and assessing the cost of other items such as electricity.

Many people have asked about the cost of petrol. Well, it might surprise you that 30 years ago, petrol was 37 cents a litre. A person on the average wage could buy 780 litres of petrol. Today a person on the average wage could buy 911 litres of petrol. Staggeringly, even petrol is more affordable than 30 years ago.

The week ahead

In the coming week, more pieces of the economic growth puzzle will be put together in Australia. Meanwhile in the US, there is a healthy sprinkling of key indicators and the US Federal Reserve chairman also delivers testimony. The European Central Bank will also provide another liquidity boost for banks – the Long Term Refinancing Operation (LTRO) – on Wednesday.

In Australia, there is little in the way of market-moving economic information until Wednesday when investors will be inundated with new information. Not only are retail trade figures for January to be issued but construction work, private sector credit (lending), new home sales and home prices are also slated for release.

It is becoming clearer that while Australian consumers are still extremely cautious, they are still spending – but more on services rather than goods. And that has shown up in the retail trade series that has largely stagnated in recent months. We expect that retail trade will have risen by just 0.5% after no growth in spending on average over the previous three months.

The construction work figures will provide further guidance on how fast the economy grew in the December quarter. Private sector credit probably rose by a modest 0.3% in January and home prices could have edged up slightly in January – a further sign that the downtrend in prices has come to an end.

On Thursday, the Performance of Manufacturing Index business spending and building approvals data are due. The business spending data refers to spending on new buildings or equipment (capital spending) while the building approvals data takes the form of approvals by local councils for new projects.

While consumers have been reluctant to spend, the same can’t be said for businesses. For the past 15 months, investment spending has been showing solid growth and the 12.3% rise in the September quarter was the strongest gain in 15 years. Mining and engineering dominate the investment gains. But after the out-performance in the September quarter we tip a flat result for spending in the December quarter.

The dwelling approvals data has proved volatile with four double-digit changes in the past five months. We expect that approvals lifted by around 5% in January after a small fall in December.

In the US, the week starts with the release on Monday of data on pending home sales together with the Dallas regional manufacturing gauge. On Tuesday, data on durable goods orders is scheduled for release together with the Standard & Poor’s/Case Shiller home price series, consumer confidence data and influential Richmond Fed manufacturing index. Home prices might have fallen 0.2% according to economists while consumer confidence probably edged higher from 61.1 to 63.1.

On Wednesday, the preliminary economic growth figures for the December quarter are released. The “flash” estimate put GDP growth at 2.8% and a similar outcome is tipped for the first revision of the data. The Federal Reserve chairman Ben Bernanke also delivers testimony to the House Financial Services Committee. While he may garner less attention than in the past, investors will assess whether he is becoming more upbeat on the economy. The Federal Reserve Beige Book is also released on Wednesday together with the Chicago Purchasing Managers Index.

On Thursday, data on car sales, construction spending and personal income are released alongside the ISM manufacturing gauge. While vehicle sales are tipped to have softened, other indicators should confirm a revival in the US economy. Personal income is tipped to have risen by 0.5% with spending up 0.4% while construction spending may have risen by 1.0% and the ISM index may have lifted from 54.1 to 55.0.

Also of note, the German parliament votes on the Greek bail-out package on Monday while the Chinese Purchasing Managers Index is released on Thursday. Government debt auctions are held in a host of countries over the coming week including Italy, Spain and Germany.

Sharemarket, interest rates, currencies & commodities

The Australian profit-reporting season grinds to a halt over the coming week. Companies expected to report earnings on Monday include Caltex and ROC Oil. On Tuesday, Aristocrat Leisure, AWE Limited, Boral, Beach Energy, James Hardie, Prime Media, QBE Insurance and Southern Cross Media are listed. On Wednesday, TAP Oil and WorleyParsons are expected to issue their profit results. Harvey Norman may issue results either on Tuesday or Wednesday. And, on Thursday, Woolworths is expected to issue its half-yearly result.

It may seem like the Australian dollar is again one of the strongest currencies, but it actually has some competition. Since the start of 2012 the Aussie dollar has risen 5% against the greenback, putting it in 17th spot of 118 currencies monitored. So far in 2012, 61 countries have posted gains against the US dollar while only 30 are weaker. The strongest currency is the Hungarian forint, up 11%. The Chinese yuan is largely unchanged against the greenback.

Our currency strategists have revised their views. The Aussie dollar is now expected to lift to US108 cents by June and hold near there until late in 2012 when it may rise to US109 cents. And from there it is tipped to lift to US110 cents by March 2013.

Craig James if chief economist at CommSec


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