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The Confusing Economy

Cameron Finlay • Jun 17, 2019

Sometimes I get confused.   Things that seem to make sense at the time, then get combined with other information so it doesn't make as much sense any more.

It all started with a statement from someone in business; things have been pretty hard for several months, but he's not only hoping but expecting a good year to come.   That's quite a leap of faith, but is it supportable?

In 2005, academic Steven Levitt published 'Freakonomics', in which he showed that at root economics was the study of incentives or how people get what they want and need.   It was a freaky way of looking at the underlying issues and causes, and proposed new ways to solve problems.   For example, Levitt sought to understand why so many gang member drug dealers lived with parents.   Simply, most of the money went to the key people, gangs were often too big to have the power to operate efficiently and the leaders did not have vital leadership skills, so little money trickled down to the ranks.   Levitt found members joined not to earn money but for fulfilment of the psychological needs of belongingness and esteem/prestige (Maslow's Hierarchy of Needs).

So, how is the Australian economy confusing?   Four surveys came out last week;

- The Westpac Business Conditions slumped from 3.3 to 0.6.   What it shows is that the current business situation has not been good for several months.

- The NAB Business Survey saw business confidence shoot up, surging from 0 to 7, the biggest jump for six years and the highest reading for ten months.

- The AIG Services Index (PSI) rose by 6 points to 52.5 points in May, the biggest increase since December 2016 (above 50 indicates expansion of services sector activity).

- Employment rose by 42,300 in May, and 43,100 in April.   Most jobs were part-time, probably due to employer fears of a Labor win because its policy was to sharply increase wages.   Employment has continued rising for twelve straight months.

Overall, those all look pretty good.   We also know business profits are up 7.8% for the year and have been positive for seven quarters in a row, forecast capital investment is up 12.8% which is the biggest increase for seven years, the Manufacturing Index is still expanding at 52.7 points, house price falls have slowed and auction clearance rates are on the rise, and interest rates have just been reduced with perhaps more to come.

Balance those against media reporting.   Media tends to seize on a number in isolation and assign the worst interpretation of it.   It has been a bad twelve months if you focus on broad media reports about economic growth slowing, falling house prices, a trade war, high debt, fears of a Labor win, and slow wage growth.   That could explain why consumers have been fearful of spending money.

But the numbers published over the last week indicate that business is gaining confidence, they're hiring and investing.   More people employed in turn pushes up consumer confidence, so with promised tax cuts and lower interest rates consumers should tend to spend more on housing and other needs, which again pushes along economic growth and job creation.

More factors are becoming positive so it follows the economic outlook also should be more positive.   But yes, we still need to be concerned about a trade war between US and China, and the possibility of a debt meltdown, and mismanagement by central banks.

The next question is will things be better soon?   Unfortunately, economies don't turn around in an instant.   But increased government spending on infrastructure and services, increased exports of resources, stimulation of the construction sector, and tax cuts will add to growth.   These are expected to lift economic growth to 2.2% this year and towards 3% next year.   A 3% rate is high growth.

Put it all together; likely a bit tough for a few months more, then expect things to improve, even for a few years.   The next economic crisis point would seem to be around 2025.   So, if you're doing a forecast or budget for the next twelve months, allow for much of the same for a few months, then for conditions to improve.

However, as 'Freakonomics' determined, always be watching for a factor that could drive the business situation for good or bad.

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