Leading Index continues to slow

Growth rate of Leading Index points to solid pace of expansion heading into 2011 despite slowing over last six months

Leading Index continues to slow
Leading Index continues to slow
November 17, 2010

The signal from both the Leading and Coincident Indexes is broadly positive heading into the New Year despite some slowing over the past six months, according to Westpac.

The annualised growth rate of the WestpacMelbourne Institute Leading Index was 4.6 percent in September, remaining above its long term trend of 3.1 percent.

The annualised growth rate of the Coincident Index was 4.8 percent, comfortably above its long term trend of 3.3 percent.

Westpac Senior Economist Matthew Hassan says the growth rate of the Leading Index continues to point to a solid pace of expansion heading into late 2010-early 2011.

However, he warns the pace has slowed abruptly over the last six months and that the speed of the turnaround is "a little disconcerting".

"At 10.3 percent, the peak growth rate in the Index back in March was extremely high and although it currently remains comfortably above its long term average a continuation of trends seen over the last few months could easily see the growth rate drop further in the near term to a below average pace."

For now though, Hassan says the Leading and Coincident Indexes are showing some promise.

"Both point to above trend expansion in the second half of 2010 and the first half of 2011, albeit with some tapering in the New Year," he adds.

In terms of the Leading Index components, domestic factors have been the main drag on growth rates in recent months.

Three-quarters of the slowdown from 9.8 percent in April to 4.6 percent in September has come from three domestic components: dwelling approvals (–1.3ppts), overtime worked (–1.3ppts) and productivity (–1.3ppts).

Moderating growth in corporate profits has also been a drag (–0.4ppts) as have external conditions with slower US industrial production effectively taking 0.5ppts off the six-month growth rate and moderating commodity price gains taking 0.2ppts off.

Despite a strong 4.1 percent rebound in September, the All Ordinaries index was also a net drag between April and September (–0.5ppts).

The real money supply offset slightly, lifting the growth rate by +0.3ppts over the same period.

Dwelling approvals continued to slide though, registering another large 6.6 percent fall following the 4.8 percent drop in August.

Growth in the real money supply was also softer, with a 0.1 percent rise after average gains of 0.8 percent over the previous six months.

US industrial production slipped 0.2 percent, the first fall since June 2009.

According to Hassan, the level of the Coincident Index, which tracks the current state of the economy, increased by 1 point (+0.4 percent) in September.

Retail trade was unchanged; employment was up 0.4 percent while the unemployment rate was unchanged at 5.1 percent.

Labour market data was more mixed for October with a 0.3 percent rise in employment but an uptick in the unemployment rate to 5.4 percent.

After rising steadily from 0.5 percent in August 2009 to 4.8 percent in August this year, the annualised growth rate in the Coincident Index held steady at 4.8 percent in September.

"This is well above the long run average of 3.3 percent but suggests the slowdown in Leading Index since March may start to appear in the Coincident measure in coming months," Hassan says.

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