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Australia’s Export Performance

Australian export volumes have grown at an annualized rate of 5.9 per cent over the past four decades.  However, this performance can be separated into two distinct periods.  There was a clear acceleration in the rate of growth in the mid-1980s.

The S&P 500 and US Manufacturing Conditions

This week’s chart illustrates the relationship between the US equity market (measured as percentage changes in the S&P 500 index) and the index of manufacturing conditions compiled by the US Institute of Supply Mangers (ISM).  The ISM index is a leading indicator of economic activity and an indicator of changes in equity market direction.

US Personal Consumption Expenditure

US personal consumption expenditure remains relatively weak.  Over the year to October 2002, it increased at a rate of 3.7% compared with an average rate of growth through the 1990s of 5.7%.

Personal Debt Levels

Loans outstanding to individuals amounted to $448.5 billion at the end of November, an increase of 13.3 per cent over the corresponding time a year earlier, according to statistics published by the Reserve Bank of Australia.

Commonwealth Defence Expenditure

Government defence expenditures were budgeted to be $13,144 million in 2002-03.  If realized, this level of expenditure would represent an increase of 9.4% over the level of defence expenditure in 2001-02.

Australia’s Balance of Payments

Australia’s goods and services trade deficit was a record $3.0 billion in December implying a likely balance of payments deficit for the December quarter of around $11 billion.

US Current Account Balance

The US balance of payments deficit has been around 4% of GDP since the second half of 2000.  Throughout the 1990s there was a progressive deterioration in the balance on current account.

International Crude Oil Prices

Crude oil prices have reached $37 a barrel on international markets.  Global conditions have not changed so greatly since the price was less than $20 a barrel a year ago.  However, market speculation in anticipation of a war in the Middle East and political strife in Venezuela have affected market risk.

European GDP Growth

GDP growth among the European economies slowed to 0.9% over the year to the September quarter of 2002, according to the OECD.  The growth slowdown is widespread with only Ireland, among the western European economies, having maintained an above average growth outcome.

Japanese Private Investment Spending

The 0.5% increase in Japanese GDP in the December quarter was a much better outcome than the widely anticipated contraction in activity.  A better than expected increase in private investment spending boosted overall growth.

Sources of Higher Education Funds

Australia’s official higher education statistics show radical changes in the funding of tertiary education.  The latest statistics, which are for 2001, show that a little under 45% of the revenue received by the higher education sector came from the Commonwealth government.

Momentum of US Economic Activity

The momentum of US economic activity has been improving, indicating that the worst of the economic downturn may have passed.

Australia’s Export Destinations

Five of Australia’s largest eight export destinations were within Asia and accounted for 42% of Australia’s $119.5 billion export revenues in 2002 according to recently released foreign trade statistics from the Australian Bureau of Statistics. The statistics also show that the economic slowdowns in Japan and the USA have had an adverse effect on Australia’s export performance.

US Budget Balance

The budget presented to the US Congress by President George W Bush estimated a deficit in fiscal 2004 of $307.4 billion which is equivalent to 2.7% of forecast GDP.

Commonwealth Government Budget Balance

The past thirty years of Commonwealth fiscal management has been a history of budget deficits punctuated briefly by unsustained surpluses.  The government is likely to work hard to present a budget next month which at least forecasts a surplus.

US Corporate Profit Growth

Statistics from the US Bureau of Economic Analysis show that after tax corporate profits rose by 4.1% in the December quarter to be 10.3% higher than a year earlier.

Global Distribution of Output

The USA and Canada account for 23.1% of global GDP according to data compiled by the International Monetary Fund. Despite the emergence of the European Union, this north American grouping remains the largest regional market with any degree of political and economic cohesion.

The S&P 500 and US Manufacturing Conditions

The index of manufacturing conditions compiled by the US Institute of Supply Managers fell to 45.6 in April. An ISM index below 50 generally signals a contracting manufacturing sector. There is a long history of movements in the ISM index being associated with changes in equity values (shown in the blue line in the chart).

US Unit Labour Costs

An aggressive approach to workforce management has been a feature of business in the USA during the past two years while economic growth has been slow.  By managing employment, productivity and compensation, business has been able to sustain its profitability at a higher level than would otherwise have been the case.  

Equity Market Value Sensitivity

The message from the macro environment highlighted in the budget documents continues to be that market values should remain depressed for the foreseeable future relative to where they were in the last years of the 1990s. If profit growth is only 5%, a p/e ratio in the vicinity of 15 is where fair value for the market exists.

Australian and US Dollar Exchange Rates

The US dollar trade weighted index which is a measure of the currency against the currencies of a broad range of major trading partners has appreciated at an average annual rate of over 4% over the 30 year period shown in the chart.

International Iron Ore Prices

Iron ore producers in Brazil and Australia have obtained price increases of around 9%. The stronger Australian dollar potentially erodes some of the US dollar denominated price gains which have been agreed. However, there has been an average annual rate of price rise of 13% since the end of 1988.

Japanese Inward Direct Investment

Japan’s role in the world economy is being transformed.  From being a driver of global growth, it is becoming dependant on other parts of the world to help accelerate its growth profile.

Australian Productivity

However it might be achieved, the amount of political goodwill the Prime Minister is prepared to risk on creating a more workable Parliament might well determine investment returns in the coming decade.

Australia-US Interest Rate Links

Do movements in offshore interest rates imply anything about what will happen to Australian rates?

Corporate Profits

The company profit data in the national accounts published by the Australian Bureau of Statistics indicate that underlying Australian business profit growth has been quite robust over the last two years.

US GDP Capital Intensity

The latest US GDP statistics have confirmed the continuing slide in the capital intensity of the US economy.

Taxes on Conveyances

Taxes on conveyances are effectively taxes on mobility and wealth which affect the demand for new housing and, therefore, levels of construction activity.

Asian Development Bank Forecasts

China’s increasingly consistent growth performance signals an influence which is binding the broader region to its fortunes and compensating for the absence of Japan as a driver of growth in the region.

US After Tax Profit

A recovery in US corporate profitability is happening. After tax profits rose by 3.7% in the latest March quarter to be 12.2% higher than a year earlier.

Asian National Savings Rates

High national savings rates in Asia remain a key to the success of the region.

Relative Bond Yields

The sharp reversal in Australian bond yields since mid-June  has simply reflected a changed view of US monetary conditions.

Australian Inflation

The benefits of having low inflation rates more in line with international counterparts show up through less downward pressure on the exchange rate, less upward pressure on interest rates and more competitive industry.

Purchases of US Equities by Foreigners

The strength of the market during the 1990s was greatly assisted by the interest in the US market from non-residents.

The S&P 500 and US Manufacturing Conditions

The Institute of Supply Managers (ISM) index of US manufacturing conditions has now put in two consecutive monthly readings above 50.

Housing Activity and Interest Rates

Additional liquidity driven through lower interest rates has had few avenues for escape. In Australia, housing has been a logical destination given its history of relative security.

China’s Impact On US Trade

The importance of China in the trading performance of the USA has been rising consistently for the past thirty years.

Market Performance and Profit Share

The recent improvement in Australian equity markets seems to be anticipating something which is not yet evident in the macroeconomic data.

US Profits and Market Movements

US corporate profits have been battling to mount a robust recovery. Not surprisingly, the equity market is also finding the going tough.

US Consumer Sentiment

US consumer sentiment is showing little sign of robust recovery.

Australia’s Unemployment Rate

A 20 year low in Australia’s unemployment rate is rightly being celebrated.

The S&P 500 and US Manufacturing Conditions

The ISM index says that the US manufacturing sector has been expanding for the past five months after contracting for seven of the prior ten.

Australian Market Performance and Profit Share

Private corporate gross operating surplus grew 3.5% over the year to the September quarter of 2003 according to statistics released by the ABS at the beginning of December.  From this position, history implies little scope for profit to grow faster than the rate at which the overall economy is growing.

The S&P 500 and US Manufacturing Conditions

Old rules-of-thumb die hard. Over the past 50 years, the monthly US purchasing managers survey has provided a leading indicator of the state of US manufacturing and a useful precursor to changing stock market conditions.

US Unit Labour Costs

Unit labour costs, a measure of the extent to which labour costs are increasing faster than productivity, are a guide to some of the pressures on business profits.

US e-Commerce Retail Sales

The US Department of Commerce has reported that e-commerce retail sales in the USA increased by 25.1% over the year to the December quarter.

Inflation Adjusted US Dollar Gold Price

The gold price has been poor protection against inflation during most of the past 20 years.

Technology Industry Conditions

The indicator of technology sector conditions in the USA prepared by the New York Federal Reserve was up 24% over the 12 months to January.

Australian Market Performance and Profit Share

There is little history of sustained share price moves occurring without significant movement in the profit share.

US Non-Performing Bank Loans

One indicator of an improving US economy is the decline in non-performing loans at US commercial banks.

Australian Household Saving Rate

Australia’s household saving rate declined for the eighth consecutive quarter.

US Profits and Market Movements

US corporate profits have continued to stage a strong recovery. 

Thermal Coal Prices

Average Australian thermal coal export prices reached US$51 per tonne in March, a doubling from March 2003 prices

Global Population and GDP Growth

Population has driven the growth in the global economy for as long as we have information, culminating in the second half of the twentieth century when the population growth rate reached its peak.

International Crude Oil Price History

A graphical chronology of the movements associated with oil price changes over the past 35 years.

Long Term Real Copper Prices

The recent rise in prices does not change the basic predicament for resource companies.

Established House Prices

The first signs were evident of a weakening in the Melbourne housing market.

US Federal Government Spending Balance

The forecast trend over the coming decade of a movement back toward a balanced budget provides comfort to the government bond market that the deficits can be accommodated.

Median Population Ages

Age changes will add to government budgetary pressures and create difficulties for policy planners setting spending priorities. Companies are also beginning to confront some important decisions.

Japanese GDP

Good economic news out of Japan has been rare but there have been signs of a recovery in activity.

Personal Income and Indirect Taxes

The burden of direct and indirect taxes is again edging up ominously.

Technology Industry Conditions

The NY Fed’s technology conditions index moved up sharply in the middle of 2003 pointing to a strong recovery in the sector from recession-like conditions which had plagued the industry for some three years.

US Industry Capacity Utilisation

US capacity utilization rates have been edging upward as the economic recovery there has taken hold.

Intermediate Goods Prices

A review of monthly data suggests the rate of increase seems to have moderated.

Inflation Adjusted US Petrol Prices

Inflation adjusted retail petrol prices are pushing toward mid-1980s levels in the USA.

Bank Index and Finance Sector Profit Share

The strong gain in Australian finance sector profits relative to economy-wide corporate profits has helped drive the performance of banking stocks .

Australian Exchange Rate Volatility

Companies have been lamenting the impact of the exchange rate on their Australian dollar results.

Australian Business Investment Spending

National accounts data for the June quarter showed, relative to the profitability of Australian business, spending on capital remained around the record low levels reached in the recession in 1990/91.

Established House Prices

Housing price movements in Sydney and Melbourne are signalling that the peak in the market has been reached for the time being.

Foreign Portfolio Equity Purchases                            

The 35% appreciation in the value of the Australian share market since the first quarter of 2003 has coincided with increased interest in Australian stocks by foreign investors.

Oil Prices and US Inflation                           

Higher oil prices do not appear to be having the same effect on inflation as in earlier years.  That has left policymakers more relaxed about the outlook.

Sources of School Funds                            

With Australia’s free universities now a faded memory, extensive changes to primary and secondary school funding have been signaled during the election campaign.

Cash and Forward Nickel Prices

Nickel prices have been among the most volatile of metal prices this year.  Spot prices on the London Metal Exchange have been at a 40% premium to 27 month forward prices in the past week indicating that fears of metal shortages are intense. 

US Industry Capacity Utilisation

US industry capacity utilisation rates have stagnated during the middle months of 2004.  This is an ominous sign that investment spending, still very weak, is not about to pick up any time soon.

US Investment Spending

US business managers have been reluctant to invest despite the strength of their recent profit growth. 

US Government Savings and Exchange Rate

There is some anxiety being shown among commentators about the US budget deficit and how it might affect the value of the US dollar.

Technology Industry Conditions

The technology industry conditions indicator for the USA produced by the New York Reserve Bank is now showing growth rates similar to those prior to 2001.

Australian Dollar and Inflation

Few financial markets are more momentum-driven than foreign exchange.

US Dollar trade Weighted Exchange Rate

Since February 2002, the US dollar has depreciated by 27% against the currencies of its major trading partners and is now pushing toward levels last seen in July 1995.

US e-commerce Retail Sales

The US Department of Commerce has begun publishing seasonally adjusted statistics for its e-commerce retail sales series.

Euro Area Consumer Confidence

Weak consumer confidence readings are symptomatic of the broader malaise confronting the European economy.

International Tax Comparison

OECD tax analysis shows why Australians might feel overly taxed but why we still rank relatively low when the tax burden is formally measured.

Private Capital Flows To Africa

Capital flow statistics suggest that Africa is gaining more attention from the rest of the world as an investment destination.

Australian Profit Share

The profit share of Australian companies has reached levels once thought impossible.  This ‘breakout’ is at the heart of Australian market action.

Uncertainty in Population Forecasts                           

The world’s population is aging.  However, the extent of the change is uncertain despite the resources put into modeling global demographic forces.  At the heart of the uncertainty are the assumptions being made by forecasters about fertility rates.

Growth and Working Age Population                           

Demographic momentum has had an impact on economic performance.  The chart shows that, among 28 advanced economies, increases in the proportion of working age populations have been associated with higher rates of per capita growth.

Australia's Export Performance                               

Australia’s export performance is as poor as it has been over the past 45 years. Only in the high interest rate and declining growth environment of the early 1980s was there any comparably disturbing effort.

Australian Company Taxes                               

Australian companies have been paying a rising proportion of income as taxes since the relatively depressed days of the mid 1980s. 

Advanced Country Output Gap And Inflation                               

Advanced economies are suffering from excess capacity, one of the reasons global inflation rates are being kept down and monetary policy has not been tightened aggressively despite near record global growth in 2004.

World Output Distribution                               

China might account for only 13% of global output but is contributing one quarter of its growth.

Direct and Portfolio Investment Flows         
Australia is dependent on foreign capital for its economic survival. Funding a current account deficit, which is now about 7% of GDP, requires that Australia continues to be an attractive investment destination.

Australia's GDP and Employment Growth         
Some commentators are talking about an inconsistency between the relatively pessimistic picture painted by the national accounts data and the relatively optimistic view from official employment statistics.

Cash and Forward Nickel Prices         
Nickel prices reflect a combination of industry supply constraints and rising demand.

Energy Intensity of GDP          
Economies become less energy intensive as economic development proceeds.

Market Rating – Growth Profile         

As the macroeconomic growth outlook is reappraised, investors should be looking for any  signs that individual stock prices are reflecting growth rates which are becoming harder to achieve. Of course, this is a test which can be applied at any point in the cycle.

Japanese Regional Exports          
Japan is benefiting from its proximity to the developing Asian economies.

Volatility of Output Growth  

Volatility of output growth is a measure of macroeconomic risk which eventually flows into profit and market risk. 

Euro Area Consumer Confidence    

European consumers have long been struggling against some strong economic headwinds.

Australia's Foreign Income Payments   

Australia needs to use a growing proportion of its exports to cover rising capital servicing charges.

US e-commerce Retail Sales               

The value of retail e-commerce transactions in the USA rose by 23.8% over the year to the March quarter.

Uranium Prices           

Uranium is becoming an economically viable source of energy again.

Currency Adjusted Gold Price                          

The gold price is a monetary phenomenon.  Unlike industrial commodities whose prices reflect scarcity, gold is readily obtainable in large quantities so its price is linked to the prices of other financial assets and expectations of their likely movements. 

Australian Credit Growth                              

There is a switch in emphasis in Australian credit growth away from housing and toward funding business spending. This is a welcome sign.

Australian Market Performance and Profit Share

Australia’s profit share remains at near record levels supporting near record market values.

Inflation Adjusted US Petrol Prices                          

Over a longer period of time and relative to other prices, the increase in US petrol prices does not appear so dramatic.

Regional Savings Rates                                     

One of the lessons from Asia has been the importance of adequate savings to fund economic development.

Australia’s Energy Trade Balance                              

Australia’s natural resource base gives it a strong energy trade surplus.  Australia’s energy exports are over nine times the level of its imports.

Duty Free Imports By Developed Countries           

Developing countries have achieved greater market access for their products among the developed nations. 

Personal Computers per 100 People 

Personal computer usage has been rising across the globe but the disparity in usage is still high. 

Global Crude Oil Reserves                                       

At current rates of production, there are 36-40 years of proven crude oil reserves left for the world to use. 

Australian Cash Rates - Inflation Adjusted            

Australian interest rates, measured relative to inflation, have returned to the range they were in during the 1960s. 

North American growth Convergence

The bond of trade seems to be forcing a convergence among the North American economies.

US Personal Saving Rate

US households have virtually stopped saving.  The latest statistics from the US for June showed that households are spending all they are earning. 

Structure of the Australian Market Economy

The structure of the Australian market economy, based on the national accounts data, is at odds with the structure of the Australian stock market.

China’s Clothing Exports

According to the World Trade Organization, the value of China’s exports of clothing grew at an average annual rate of 18½% between 1985 and2003.

Importance of National Gold Reserves

Gold is of declining importance as a store of value for national governments.

Euro Area Growth Differences

There has been a wide disparity in European growth outcomes despite monetary union.

Global Refinery Capacity and Oil Demand

Crude oil refining capacity has increased by just 6% since the late 1970s according to data compiled by the International Monetary Fund. However, over the same period, demand has risen by 28% leaving only 2% excess capacity.

Australian Business Equipment Spending

Business capital spending has not been as buoyant as one might have expected from business conditions.

Signs of Capital Replenishment

The amount being spent on capital in Australia each year tends to be below the value of the capital actually being consumed.

Australian Employee Incomes

The share of employee income in the national economy is at an all-time low point.

Economic Confidence in the USA

A conspicuous divergence between consumer confidence in the USA and business confidence has emerged.

OECD Leading Indicator

The OECD’s composite leading economic indicator for its member countries has taken on a more positive tone in recent months.

Australian Credit Growth
The lending data from the Reserve Bank is confirming an important switch in emphasis. 

UK Company Profitability
UK manufacturing profitability (measured as a return on funds employed) has been declining for eight years from the peak levels reached in the late 1990s. 

Japanese Investment Abroad
In 2005, investment by Japanese residents abroad rose to levels not reached since before Japan became mired in recession. 

Foreign Direct investment  
The developing Asian economies are attracting twice the level of foreign direct investment going to central and eastern Europe according to the International Monetary Fund. 

US Household Debt Service Payments          
There has been a dramatic rise in the debt servicing obligations of US households. 

Company Return Rankings          
General comments about company financial performance conceal a significant range in outcomes even among the largest of Australia's listed industrial companies.

Technology Industry Conditions       
Conditions in the US information technology industry have appeared a good deal stronger than the US equity market is suggesting. 

Copper prices and Open Interest
Speculative interest can drive markets higher but is also attracted to markets in which prices have risen already.