What's The Worst Question in the World? "Are We There Yet?" / by Adam Howard

The last couple of Updates have covered the property market and its ups and downs both here, and in the US.

I don't want to be obvious, but you may have guessed that in my opinion the Sydney property market is showing signs of what our ol' mate, ex Fed Chairman Alan Greenspan referred to as "irrational exuberance."

Melbourne is not in the same category, but has still experienced some fairly nice gains over the past few years.

This is clearly not the case here in Perth, where the metro area's median house price hasn't really increased at all since 2007, prior to which it nearly doubled between 2003 and 2007.

But then, that's why trend lines are important, because curves showing price movements, or for that matter movements in anything measurable, NEVER have a smooth gradient.  There are always peaks and troughs.

The thing people, or large, large groups of people (maybe refer to those groups as a "herd") struggle with is developing an accurate idea of when trend lines might be starting or finishing.

Because we struggle with that, herds tend to overshoot or undershoot market peaks and troughs.

On the topic of trend lines and measuring stuff, I thought another couple of topics that are SO HOT right now are recessions and unemployment.  

Firstly, a recession.  Gentleman Joe Hockey says we aren't going there.  But I want to ask another question.  "Are we there yet?"

And on unemployment, if I was really narcissistic and self-serving, I could say it is people who take out loans and buy property, so looking at how many people do or do not have a job is critically important.

But having stable, meaningful gainful employment has been shown to be critically important to psychological health.  It provides focus, purpose and structure.

Note, I didn't say anything about money there.  I have written previously about the belief that beyond annual earnings of $75k USD there appears to be a diminishing positive correlation between extra dollars earned and extra happiness.

And over the past 2 years, in Western Australia in particular, but across Australia in general, the levels of unemployment have been creeping upwards.

Don't listen to me.  Here is proof:


The blue trend line is Victoria, the red Western Australia and the green an aggregate of the other states.  I started the trend lines at the same point in time and we can see the steepest trend upwards for unemployment is in WA.  That's right....

Still the lowest percentage of the population unemployed, but that amount is increasing the fastest, and that's the part that hurts.  Yes, rising unemployment isn't good, but when it happens quickly that hurts as there is less time to adjust and get used to a new reality.

 We all know why this is happening: a sharp drop in commodity prices as a result of falling demand, which has occurred at the same time as the mining and oil and gas sectors transition from large plant and site construction to operation.

Despite knowing this, it's always nice to see a couple of pictures that display it clearly.

Firstly, here is a graph that uses state-by-state employment growth for the decade 2000 to 2010 to show, fairly starkly, WA's reliance on resources.

So, to interpret, that says that over 40% of the employment growth in WA for the decade 2000 to 2010 was generated by the mining sector.

BUT, and there is always a but, the mining sector was NEVER a big part of the WA labour force, even when it grew quickly and substantially.  And this is obviously even more so the case for the rest of Australia.

Once again, don't listen to me.  Here's proof.

Before I talk about the above graph, I need to apologise.  It's old data.  2009.  But it is the most recent data in graph form I could find.

In 2009, in absolute numbers of people employed, mining came in behind the following industries:  retail, construction, health care and social assistance, manufacturing, education and training, public administration and safety, professional, scientific and technical services, accommodation and food services and transport, postal and warehousing....

Even when mining grew to approximately 85,000 direct employees in 2011/2012, it still only came in 5th by sector.

And Australia-wide, using only very broad sector definitions, the trend is even more dramatic.

Good trend lines, huh?  Long term graphs are always the best.  Declining manufacturing and agriculture numbers.  Consistent mining and construction numbers, and sharply rising service sector numbers.

But here is a graph that shows why it has hurt the economy so much; the outsized impact of each extra employee in the mining sector on economic activity.

The downside has been that since the construction phase in both the hard rock mining and oil and gas sectors have wound down, or are winding down, the value added per employee has dropped.

This has then been exacerbated by sharp drops in the prices of iron ore, coal, oil and gold, resulting in a further drop in value added per employee.

Around the same time the iron ore price peaked (mid 2011) Perth (and greater WA) was home to the world's largest population of oil and gas engineers.  Not sure if everyone was aware of that...

Now, this unusual population is fairly mobile and moves with the work, which is driven by the oil price.

Over the past 2 years this population has dwindled, with engineers leaving for the Middle East, Central America, the US and Gulf of Mexico.

This has also left an employment and spending hole in WA's economy.

The flow on impact for engineers has been that the WA market is now awash with both qualified and experienced, and newly graduated engineers, all looking for work in their various sectors:  oil and gas, hard rock mining, civil construction, residential development, electrical engineering.

But there just isn't enough work.

Result: hold onto the best, but at lower prices.

In the short term this caused a squeeze for some major corporations where they had to drop their tender prices for new projects, to the point where the projects were either break even or slightly unprofitable, purely as a bid to hold onto their skilled workforce.

At least if some work is coming through the door you can afford to pay and keep your best and brightest, but if not, they walk, or the corporation needs to take some tough decisions.

And what do big corporations do when the marginal utility per employee drops?  They drop those employees like their hot (thanks, Snoop Dog).

Next?  Large project firms start bidding for work that has previously been outside their remit.  After all, some work is better than no work.

Result?  Lower bids for the projects, which was interpreted as a good thing as it was seen as confirmation of the long-touted belief that labour productivity had decreased and prices were too high.

But, too often the bids reflected poor estimating and scheduling, coupled with an inability to execute.

Results?  Budget overruns, missed deadlines and customers losing money.

Now, the above is not a summary of our current state.  No, data never is.  Data shows WHAT HAS ALREADY HAPPENED.

The price of our exports (read, iron ore) hid the state of WA's domestic economy for a long while.  I think everyone suspected things weren't great as the answer to my question to business owners of "How's everything going?" was often "It's a tough market."  And that has been the case for about 2 years.

And we have data that proves this.  The two ways of measuring the level of activity within an economy, our economy, are Gross Domestic Product (GDP) and State Final Demand (SFD).

GDP includes internal and external trade.  External trade is the value of everything that is sold to and bought from overseas.

SFD only measures the value of domestic economic activity.  So imports and exports are excluded. 

Here is a graph showing WA's SFD over the past 6 years to Quarter 2, 2013.

Once again, this is oldish data, from Quarter 2, 2013, but fortunately I was sent something very helpful by an old mate we will call The Dog Whisperer.  Here is a quote from a Deloitte National Accounts briefing released this week which he sent me:

·         In WA, state final demand (note this isn’t the same as GDP, as it excludes trade, which is a very important part of WA’s economy) was up a surprise 1.5 per cent on the quarter, marking the first increase since March 2014. However it was still down on the year, marking the 10th straight decline.

So, with the exception of the March 2015 Quarter, there have been 10 straight quarters of declining domestic economic activity.  My maths show this takes us back to the December Quarter of 2013 as the first of the 10 straight quarters of declining SFD for WA, which neatly matches with the above graph.

Before I go on, I want to remind everyone of my theory that it's pointless looking at macro markets such as the Australian economy, or the Perth metro area property market.  We are better served by looking at smaller markets for real indicators.

That's my idea here; to look at the domestic-only WA economy.

Another point.  The definition of a recession is 2 subsequent quarters of negative economic growth, and, according to the text books, recessions generally last 6 to 18 months.

Final point.  Our honourable Federal Treasurer, Joe Hockey, has flatly stated that "...there is no risk of recession in Australia..."

Now, I don't purport to be an expert.  And I don't want to call anyone a liar, but I am OK with calling someone a fool...and I think Big Joe is being a bit foolish here.

WA has been in a recession of sorts for about 18 months, and we may be approaching the bottom of it now.  Bold statement, I know.

I say this because all the data we have been looking at are of "lag" indicators; stuff that HAS happened, sometimes a long way in the past.

For a guide and what might happen we need to look at leading indicators, and current economic conditions.

The AUD is now below 70c US, 36% off it's peak, making our exports a lot cheaper.  I spend a bit of time in Henderson and I can confirm WA is building or about to build a lot more boats than we have for a while.

From what I hear out of our 3 main universities, it appears there's a lot more interest from overseas students than has been the case for 3 years.

So, it appears WA is either at or close to the bottom of the curve, and might be pulling itself out of a recession here...maybe.

Something that needs to be identified though is the  impact this slowdown has had on employees and their attitudes to work.

The pressures applied by a reduction in job security, an increase in workplace complexity, increased pressure to reduce costs and keep wages low and increased pressures to increase labour productivity have left a lot of employees feeling fairly negative about their work and employer.

Here is a cool TED talk that fairly accurately describes modern corporate life and its impact on employees:

The Complexity of Work

And here lies the challenge for corporate WA.  How do companies win back the trust of their employees?  How do they apologise for the fear, the confusion and  pressure and get them to be committed and productive again?

Food for thought....