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Economic shock! What I’m negative about

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By Peter Switzer
 
This one will shock some of my critics who wonder why I’m so optimistic when there’s so much you could worry about - the economy, the stock market, government debt, wages and consumer confidence.

It might surprise those who think I’m always optimistic but there are concerns I’m watching. However, given the positives, which I listed last week here, I do believe in the list of good things that trumps the list of bad things, and Donald Trump, who remains one of the pluses in as much as Wall Street still believes in his tax cuts.

That all said, let me list the things that worry me:

  • Slow wages growth has been persistent for too long, though the national wage bill rose 1.2% in the June quarter and this was the biggest lift in two years! This needs to be the start of something good.
  • Consumer confidence remains persistently low and these two diagrams show it all:

 



 
 
Note how the consumer confidence number has been below 100 for 10 months straight. When that happens, pessimists outnumber optimistic consumers.
In the second chart, since the GFC and the end of the stimulus from government spending (that came with $900 cheques and lots of school halls), confidence has hung around or below the 100 level. That said, when the GFC market crash happened, consumer confidence was around 80! So it’s not great now but not as bad as it could be.

  • Retail trade, which fell 0.6% in August after a downwardly-revised fall of 0.2% in July. Sales had averaged gains of 0.4% a month in the previous four months. Annual sales growth fell from 3.5% to 3.1%. I don't like these numbers but retail doesn’t measure services and it has fallen from around 33.3% of household spending in 2010 to a tick over 31.2%. Going to a gym is a service that eats into spending and the modern shopper is increasingly going online to buy goods cheaper.
  • Power bills! While they’ve gone up in dollar terms, The Age’s Peter Martin recently showed that our electricity and gas outlays as a percentage of household income is 2.9%. And guess what it was back in 1984? Yep, 2.9%! A few years ago, it was 2.6% but the rise has been small up to last year, which his numbers go up to, but I’d be surprised if they were much higher than 3.3%.
  • The dollar is too high and needs to go to around 70 US cents to give us the economic growth that will spark wages and stock prices growth.
  • Housing construction is slowing and will slow down but those who are worried about this are jumping the gun. We probably have one or two good years before it’s a real worry.  “Approvals by local councils to build new homes rose by 0.4% in August after falling 1.2% in July and soaring by 11.1% in June. In trend terms, approvals rose for the seventh straight month, up by 1.1%,” reported CommSec’s Craig James only last week.
  • The Budget Deficit is big and was expected to be a $37.6 billion deficit for 2016/17 but it ended up at $33.15 billion (or 1.9% of GDP). The USA’s is 3.2% and the UK is at 2.3% of GDP.
  • Our Government debt to GDP is a worry at 34.2% of GDP but the USA is at 106.7% of GDP and the UK is at 84.6% while the great Germany is at 84%. Japan? Don't ask, at 237% of GDP!
  • How quickly the US central bank — the Fed — raises interest rates over 2018. If it’s too fast, it could hurt Wall Street at a time when I expect our stock market to be on the rise.
  • The US Congress saying no to President Donald Trump’s tax plan, which Wall Street would absolutely hate! However, on the flipside, if they say yes, it will be great for stocks.
  • China is a worry for economic slowdown and debt reasons but it seems to be growing better than experts were thinking. The official manufacturing gauge rose from 51.7 to a 5-year high of 52.4 in September, with the services gauge up from 53.4 to a 3-year high of 55.4. On debt, as it lends to itself and the rest of the world (the USA is its biggest customer for borrowed funds), as Communists these guys can always change the rules to fix a problem.

That said, when I can’t fully understand something I won’t invest in it so it worries me when a risk isn’t fully weighable.

Things like house prices worry me a little but they are starting to increase at a slower rate, while auction clearance rates are slowing in Sydney and Melbourne, which is a good thing.

One final biggie is household debt to GDP, which is something that’s often cited by doomsday merchants, such as Professor Steve Keen, and hedge fund operators, who are trying to make money out of shorting Aussie banks.

By the way, our banks are in the top 50 banks of the world and they were in the top 10 when the biggest banks in the world looked like nincompoops when the GFC hit.

I admit that our household debt is big but someone like John Edwards, a former banking chief economist and RBA board member, agrees with me that the threat of this debt is exaggerated. I’ll look at this as a separate piece later this week.

As you can see, the problems we face are either getting a bit better (such as wages growth) or they’re very hard to understand (such as China’s debt) but, overall, the magnitude of the positives explains why the very cautious Reserve Bank of Australia thinks we’ll grow at 3% plus over 2018. We couldn’t do that if economic Armageddon reigns.

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Published: Tuesday, October 10, 2017


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