It is my unabiding belief that the NAB Business survey is the single most important piece of economic data to be released each month and that the quarterly surveys with the bigger respondent count are the best yet. So it is each month that I look closely through the survey and its subcomponents for clues on the direction of the Australian economy and clues about where the RBA is headed with interest rates. Over the years this survey has made me and my clients a lot of money.

So the release of the December Survey this morning showing a huge boost in confidence (from -9 to +3 in December) caught my eye but mostly because this massive uptick and recovery from confidence lows last seen in April 2009 masked the enduring underlying weakness in the Australian economy.

The NAB itself says of the survey,

Business confidence posts a sharp jump in December, but not so activity and forward indicators, which remain poor – particularly wholesale, manufacturing, retail and construction. Better external sentiment (temporary avoidance of the US ‘fiscal cliff’), strengthening in Chinese data and lower rates have all helped confidence. Despite this forward indicators point to a further slowing in Q1 growth. Survey highlights weak core inflation. We still expect three rate cuts (starting in Feb) and growth of only 2% in 2013.

That is an aggressive stance on rate cuts at a time when many pundits and forecasters are looking to the green shoots of growth in the US and elsewhere a sign that the RBA will hold fire for a while and perhaps, as Stephen Koukolous suggested last week and then tweeted today that,

“some scope to start thinking RBA rate hiking cycle will start before year end…the economy will be doing so well”

MMMMM…if 2009 is any guide The Kouk is on the money but it’s not 2009 and unless he already knows that his old boss Julia Gillard has the cheque book out for a series of handouts to families then it is difficult to see where the strength that drives rate cuts is going to materialise from if the NAB survey is anything to go by.

Certainly Business conditions recovered from -6 to minus 4, certainly profitability recovered from -11 to -6, sure employment recovered from -5 to -3 and forward orders from -11 to -5 but stocks are back where they were two months ago at -2 and exports have fallen to -4 with capacity utilisation also falling to 79.7% from 80.1%.

Indeed the NAB points to a relationship and leading indicator that I was previously unaware of until today when it looks at the relationship between the conditions component generally and the wholesale sup component of the index. The NAB says of this relationship,

The weakness in wholesaling that has persisted for the best part of three and a half years was accentuated in December, with trend conditions falling to the lowest level in the history of the survey (-20 points).
Based on historical relationships, wholesale conditions appear to be a reasonably good forward indicator of overall business conditions – certainly there is strong statistical evidence of a leading relationship (Granger causality). Our analysis suggests that if the December reading for wholesale conditions were to continue in Q1 2013, overall business conditions could be expected to fall to around -8 index points. That, in turn, is suggestive of an economy running at around 1 per cent growth in annualised terms.

OUCH!

Now of course I hope that the Kouk is right and we had a great Twitter chat last week about how Australians would be better off emotionally and economically if they focussed on the positives and took a glass half full approach as opposed to a glass half empty approach.

But just like when we are trading we must trade the market in front of us or when we are playing golf as Harvey Penick used to say – “you’ve got to dance with what brung ya” – the reality is that Australian’s are burdened still with too much debt both in aggregate at a householder level and clearly at an individual emotional level.

So they are a bit half empty and the economy is suffering at home which means that the world needs to lift our boat as the local tide is too slack. Now of course that could happen if this US recovery gains ground and if the Chinese soft landing continues or builds momentum.

But if the global economy continues to splutter along and if the NAB survey and the NAB forecasts are right then the RBA is indeed going to have to cut – perhaps not 3 times but maybe once or twice this year. At the same time a spluttering recovery will likely feed a continued rotation away from safe harbours and place the Aussie under further downside pressure.

I trust the NAB survey as it has always been a solid indicator of the economy and if it’s right again this quarter there is some big scope for disappointment in Australian data in the months ahead.

The Full survey is below – thanks to Scribd

NAB Business Survey December 2012 by