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Westpac – Melbourne Institute Indexes of Economic Activity

July 2010
The level of the Westpac – Melbourne Institute leading index of economic activity
The leading index increased 0.4 points (0.2 per cent) in May while the annualised growth rate decelerated
decelerated further in
further, to 6.7 per cent, from 7.5 per cent in April and 8.6 per cent in March.
May…
On a more positive note, the coincident index increased 1.1 points (0.4 per cent) (see
…while the coincident Table 1) in May. The annualised growth rate rebounded to 3.7 per cent, 0.6 percentage
index displayed a more points above its long term trend. The Westpac Melbourne Institute Consumer Sentiment
positive note. Index also showed some positive signs. The index rose 11.1 per cent in July, reversing
losses in the previous three months.

Table 1: Indicators of activity


Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
Leading Index level (1980=100) 259.3 260.5 262.0 264.3 264.3 264.7
Growth rate (annualised) 6.9 7.3 7.8 8.6 7.5 6.7
Trend growth (annualised) 3.0 3.0 3.0 3.0 3.0 3.0
Coincident Index level (1980=100) 248.2 249.7 249.4 250.3 251.3 252.4
Growth (annualised) 2.1 3.0 2.6 2.9 3.3 3.7
Trend growth (annualised) 3.2 3.1 3.1 3.1 3.1 3.1

Chart 1: Leading index (growth) Chart 2: Coincident index (growth)


% % % %
9 9 9 9

6 6 6 6

3 3 3 3

0 0 0 0

-3 -3 -3 -3

-6 Actual Trend -6 -6 Actual Trend -6

-9 -9 -9 -9
May-00 May-02 May-04 May-06 May-08 May-10 May-00 May-02 May-04 May-06 May-08 May-10

© The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Page 1
Around the world Leading and coincident indexes for a number of key economies are in Table 2. Though
global growth is still positive, a concerted deceleration seems imminent. The question
now is whether the world can ward off a double dip recession. The odds seem stacked
against avoiding the double dip as economies are starting to implement fiscal austerity
packages to address large budget deficits, particularly in the European Union. But by far
the most worrying aspect of the lackluster rebound from the Great Recession is that it
may be a sign that there is something fundamentally wrong with the global economy. It’s
been almost two years since the collapse of Lehman Brothers yet a clear rebound in
activity remains illusive.

So far, the US economy remains on a recovery path supported in the near term by the
fiscal and monetary policy stimuli and a boost from the inventory cycle. But a sustained
rebound seems unlikely without a firm recovery in the labour market. Though the US
unemployment rate declined to 9.5 per cent in June, the fall was entirely driven by a fall
in the participation rate. The number of long term unemployed (those jobless for 27
weeks and over) make up about half (45.5 per cent) of all unemployed persons.

The outlook for the euro area remains soft. High unemployment is also plaguing Europe.
The area’s unemployment rate now stands at 10 per cent. The German economy is a
driver of the modest recovery but with a weakening in global prospects, trade dependent
Germany may not be able to hold on to the rebound.

In Japan, real GDP grew 1.2 per cent in the first quarter. The economy is expected to
remain on a recovery trend but, growth momentum is likely to slip in the course of 2010
following the waning impact of fiscal stimulus measures on domestic consumption and a
stabilisation in the growth of net exports.

In China, real GDP growth decelerated to 10.3 per cent year on year in the June quarter.
Though growth remains robust, worries persist about rising inflationary pressures, a surge
in house prices and possible bad debt at state owned banks following record lending in
2009.

Table 2: International indicators


Leading indexes: per cent growth rates Coincident indexes: per cent growth rates
One month Latest month One month Latest month
ago ago
Annual rates (per cent)
United States 4.7 2.9 May Slow/Average 2.7 3.1 May Average
Canada 14.1 10.0 Apr Average 4.5 4.0 Apr Average
Mexico 2.0 1.6 Apr Slow/Average 4.4 4.1 Apr Average
Germany 11.4 12.1 Apr Average 2.9 3.3 Apr Average
France 8.6 9.7 Apr Average 2.1 2.8 Apr Average
United Kingdom 3.3 2.4 Apr Average 0.5 0.7 Apr Average
Italy 17.7 9.7 Apr Slow/Average -0.9 0.4 Apr Slow/Average
Spain 1.0 0.4 Apr Recessionary/Slow -0.5 -1.0 Apr Recessionary/Slow
Switzerland 7.9 7.1 Apr Average 1.9 2.2 Mar Average
Sweden 14.1 15.7 Apr Average 2.9 4.3 Apr Average
Japan 13.8 11.5 Apr Average 6.8 5.7 Apr Average
China 9.7 6.5 Apr Average 16.2 12.7 Mar Average
India -5.7 1.5 Apr Average 13.8 10.4 Mar Average
South Korea 14.0 16.4 Apr Average 8.8 9.0 Apr Average
Taiwan 11.8 12.7 Apr Average 17.2 17.5 Apr Average
New Zealand 9.7 8.1 Apr Slow/Average 1.7 1.8 Mar Slow/Average
Source: Economic Cycle Research Institute, International Cyclical Outlook , June 2010

Page 2 © The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
Components of the Leading Index1

Two of the four monthly components of the leading index rose in May and two fell. The real money supply and US
industrial production rose 0.7 and 1.3 per cent while the all ordinaries index and dwelling approvals fell 7.8 and 6.6
per cent.

Three of the four quarterly components of the leading index, rose in the March quarter and one fell. Overtime
worked, manufacturing materials prices and real corporate gross operating surplus rose 5.0, 2.0 and 1.9 per cent
while productivity fell 0.7 per cent in the quarter.

Contributions of the components to the annualised growth of the leading index are presented in Table 3.
Contributions from US industrial production remains the strongest driver while contributions from the all ordinaries
index and dwellings are now zero. This suggests that so far, downward pressures on GDP from domestic factors are
counteracted by upward pressures from overseas. With the deterioration in the global outlook, it is not clear how
long this can continue.

2
Table 3: Contributions of the components to the annualised growth rate of the leading index
Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
All ordinaries index 1.1 0.7 0.6 0.8 0.5 0.0
Real money supply 0.1 0.1 0.2 0.5 0.4 0.6
Dwelling approvals 1.3 0.9 0.7 1.1 0.4 0.0
United States industrial production 1.2 1.7 1.6 1.7 1.8 2.2
Manufacturing materials prices -0.9 -0.1 0.5 0.8 1.0 1.1
Overtime worked 2.1 2.1 2.1 1.7 1.2 0.8
Productivity 1.9 1.9 1.9 1.7 1.5 1.2
Real corporate gross operating surplus 0.1 0.1 0.1 0.4 0.6 0.8
Index 6.9 7.3 7.8 8.6 7.5 6.7

1
Source data were obtained via the ABS and Reserve Bank websites, the Federal Reserve Bank of St. Louis FRED® database and the ACCI-
Westpac Survey of Industrial Trends.
2
The annualised growth rate of the leading index represents the smoothed growth in the index over the previous twelve months centered at six
months. The contribution of a given component to the annualised growth rate of the leading index may therefore be positive (negative) even if
the contribution of that component is negative (positive) in the most recent month. Due to rounding errors the sum of the contributions of each
component of the leading index may not exactly sum to the annualised growth rate of the leading index.

© The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Page 3
Chart 3: All ordinaries index Chart 7: Manufacturing materials prices
10 8

6
5

Quarterly % change
Monthly % change

4
0 2

-5 0

-2
-10
-4

-15 -6
May-05 May-06 May-07 May-08 May-09 May-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Chart 4: Dwelling approvals Chart 8: Overtime worked


20 30
20

Quarterly net balance %


Monthly % change sa.

10 10
0
0 -10
-20
-10 -30
-40
-20 -50
May-05 May-06 May-07 May-08 May-09 May-10 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

Chart 5: Real money supply (M3) Chart 9: Inverse real unit labour cost measure of
productivity
3 2.0
1.5
Quarterly % change sa.
Monthly % change sa.

2
1.0

1 0.5
0.0
0 -0.5
-1.0
-1
-1.5
-2 -2.0
May-05 May-06 May-07 May-08 May-09 May-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Chart 6: United States Industrial Production Chart 10: Real corporate gross operating surplus
2.0 12

1.0 8
Quarterly % change sa.
Monthly % change sa.

0.0
4
-1.0
0
-2.0
-4
-3.0

-4.0 -8

-5.0 -12
May-05 May-06 May-07 May-08 May-09 May-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Note: Chart 9 shows the inverse of real unit labour costs. Increases in this indicator imply that real unit labour costs—and
therefore productivity—have declined and positively influence the leading index.

Page 4 © The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
Components of the Coincident Index3

Of the three monthly components, real retail trade fell 0.1 per cent in May. Employment was up 0.2 per cent while
the unemployment rate fell 0.2 percentage points to 5.1 per cent in the month. Looking ahead, employment rose
0.4 per cent while the unemployment rate remained unchanged in June.

Data on real Australian industrial production, real gross non-farm product and real household income are available
on a quarterly basis. Real industrial gross product and real household income were each up 0.6 per cent in the
March quarter while real gross farm product each rose 0.7 per cent.

Contributions of the components to the annualised growth of the coincident index are presented in Table 4.
Surprisingly, the contribution of employment remains strong while that of retail trade remains zero. This suggests
that although people are employed they are not spending it on retail purchases. Two candidates why this may be the
case are that people spend their earnings on other things, such as housing, or, people are refraining from retail
spending because they have concerns over job security.

4
Table 4: Contributions of the components to the annualised growth rate of the coincident index
Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
Real retail trade 0.0 0.2 -0.2 -0.1 0.0 0.0
Civilian employment 0.7 1.0 0.8 0.9 1.0 1.0
Unemployment rate 0.0 0.4 0.4 0.3 0.3 0.5
Real industrial gross product 1.0 1.0 1.0 0.9 0.9 0.8
Real gross non-farm product 0.9 0.9 0.9 0.9 0.9 1.0
Real household income -0.6 -0.4 -0.3 -0.1 0.2 0.4
Coincident Index 2.1 3.0 2.6 2.9 3.3 3.7

3
All source data were obtained via the ABS and Reserve Bank websites.
4
The annualised growth rate of the coincident index represents the smoothed growth in the index over the previous twelve months centered at six
months. The contribution of a given component to the annualised growth rate of the coincident index may therefore be positive (negative) even
if the change in that component is negative (positive) in the most recent month. Due to rounding errors the sum of the contributions of each
component of the coincident index may not exactly sum to the annualised growth rate of the coincident index.

© The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Page 5
Chart 11: Real retail trade Chart 14: Real industrial gross product
5.0 7
4.0 6
Monthly % change sa.

Quarterly % change
3.0 4
2.0 3
2
1.0
1
0.0 0
-1.0 -1
-2
-2.0
-3
-3.0 -4
May-05 May-06 May-07 May-08 May-09 May-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Chart 12: Civilian employment Chart 15: Real gross non-farm product
1.0 3
Quarterly % change sa.
Monthly % change sa.

2
0.5

0.0
0

-0.5 -1
May-05 May-06 May-07 May-08 May-09 May-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Chart 13: Unemployment rate Chart 16: Real household income


3 8
Monthly % (inverted scale) sa.

6
Quarterly % change sa.

4
4

2
5
0

6 -2

-4
7 -6
May-05 May-06 May-07 May-08 May-09 May-10 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Page 6 © The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
Westpac – Melbourne Institute
Indexes of Economic Activity

The Westpac – Melbourne Institute Indexes of Economic Activity are designed to assist the decision making process of business
analyst and policy makers interested in identifying turning points in the economy. Each index combines several variables that
reflect different aspects of the economy. Combining these variables into a single index generally produces a more reliable
cyclical indicator than any single component taken individually.

We report on two indexes, a leading and a coincident index of economic activity. The leading index of economic activity
provides advance information on the state of the economy and gives early warnings of cyclical turning points. The coincident
index gives a monthly picture of activity and provides more timely information on the economy since economic activity as
measured by gross domestic product (GDP) is only available quarterly with a publication lag of over two months.

Disclaimer: Westpac Banking Corporation, the University of Melbourne and the Melbourne Institute give no representation,
make no warranty, nor take any responsibility as to the accuracy or completeness of any information contained herein and will
not be liable in contract tort, for negligence or for any loss or damage arising from reliance on any such information. The
Westpac – Melbourne Institute Indexes of Economic Activity report presents the professional analysis and views of the
Melbourne Institute. These views and findings do not necessarily coincide with those of the Westpac Banking Corporation.
For information on the data contained in the report contact the Melbourne Institute, The University of Melbourne on
(03) 8344 2196.

 2010 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research
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