Friday, September 2, 2011

Building Approvals Show the Coming Slow Down.

Building Approvals by Value are, obviously, a good indicator of likely levels of future construction activity.

New buildings leads to new furnishings, plant & equipment, and technology sales so provide opportunities in those other areas including retail. 

During the GFC the Federal Government supported the building industry and construction workers through the insulation and school building programmes. Most of those jobs are now finished or soon will be. So what does the future hold?

The Australian Bureau of Statistics (ABS) series 8731, table 39, Value of Building Approvals by State/Territory as of June shows that building approvals by value across Australia are in a major downtrend. That can be shown in both semi-logarithmic and linear axis charts. The semi-log chart allows a more meaningful evaluation of changes over time.

There are a number of noticeable events in this chart:
1. The slump before the 1974 stock market crash
2. The slump before the 1982 bear market
3. The major boom in approvals between 1987 and 1991, and the slump prior to the 1992/3 recession
4. The slump in approvals prior to the 1992 recession
5. The double dip now occurring, reflecting the pre GFC slowdown, government stimulus and the run-off of that stimulus.

By clicking on the chart to see the larger version the dimension of the slowdown in approvals compared to previous periods is quite evident (directly comparable in nominal terms as a result of the use of a semi-log scale). It is not as severe as the 1989/91 downturn, but is comparable to each other slump. If adjusted for inflation, it may well be more severe than many of the seemingly similar slumps that happened in times of higher inflation.

So what does the next 12 months hold?

There is a lag of, in the main, 3 to 12 months in building starts compared to approvals. The slump in approvals is a harbinger of substantially reduced activity and employment in the construction industry and those that benefit from the spending decisions correlated with construction and its completion.

While the NBN roll out may absorb some employment as the insulation program did, there will be reduced employment in the construction industry most of which will not be taken up in the resources industry.

Reduced employment will result in falling retail sales as consumers see an increased risk of personal unemployment and defer purchase of durables and forgo discretionary expenditure, initially by moving purchases down market and reducing frequency of things like restaurant meals. Construction and Retail were two of the major areas of reduced employment in the US as a result of the mortgage crisis, busting of the home building and value bubble and GFC, but the scale will likely be smaller in Australia.

The chances of a slump of the current magnitude not having an adverse effect on GDP and employment are very low.

The likely consequences are:
1. fall in profitability of retail, construction and discretionary services
2. increased unemployment
3. a lower stock market in Australia

The likely timing is 4 to 8 months based on the lag between current jobs finishing and the reduced activity from the reduced level of new jobs becoming more obvious to the general community.

Now is the time for government to plan the infrastructure renewal and its tendering, costing and execution (to avoid the problems of the insulation and school building programmes)  so as to be able to take advantage of the opportunities that arise and to ameliorate the downturn.

The nominal axis chart below provides a better view of thevolatility of the swings in approvals of the last 5 to 7 years.

Please note the trend lines and 12 month simle moving average are different between the two charts as a result of the different scales used for the vertical axis.

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