The Economy: No Rate Cut Next Tuesday? Chinese Manufacturing Still Sluggish

Forget the rate cut talk ahead of next Tuesday's March Reserve Bank Board meeting, this week's flow of data shows the economy is right where the RBA wants it to be, warm, but not too hot.

The resources boom is well and truly booming home building is offsetting that with a required level of weakness and manufacturing is alive and expanding, contrary to all those who have been forecasting its collapse in recent months.

But the feeling that many people have that the economy isn't quite right will continue while the adjustment to the lower spending future by consumers, and the impact of the higher Australian dollar reshapes much of manufacturing and retailing.

And while the economy will in fact be doing well, it just won't feel like good times, a point that will be underlined by what are expected to be moderate growth numbers for the 4th quarter of 2011 to be released next Wednesday.

Yesterday we learned that manufacturing sector grew for a third successive month.

According to the Performance of Manufacturing Industry (PMI) survey by the Australian Industry Group and PricewaterhouseCoopers, the PMI was 51.3 for February was only 0.3 index points down on the January reading. (Remember, above 50 indicate an expansion in activity).

Australian Industry Group (Ai Group) (ASX: AIG) chief executive designate, Innes Willox, said in a statement that the result suggests manufacturing remains resilient in the face of the high Australian dollar.

"The movement of new orders into positive territory for the first time since the middle of 2011 is also encouraging."

So manufacturers are still doing it tough, but there seem to be signs of adjustment under way, which is what we want to see and what the Reserve Bank said last month it was starting to see from its chats to companies.

That should be the focus of current economic policy - allowing companies and their employees to make the adjustment to life under a high dollar, not shielding it with handouts every time a company closes a factory and lays off staff.

That hurts, but what also hurts employer and employee is hanging on, existing on government handouts, uncertain about the future and not knowing what will happen when the aid runs out.

Changing this attitude will result in a higher productivity, a more competitive manufacturing sector, and a future for what is still a vital part of the economy.

And the resources boom continues. Yesterday we saw the private investment figures from the Australian Bureau of Statistics (ABS) showing a 0.3% fall in seasonally adjusted terms in actual spending in the December quarter (to a near record $37.9 billion).

But that fall was from the 14.6% surge in the September quarter, which was the highest increase for 15 years, so the level of spending in December was at near record levels.

Spending on buildings and structures rose 0.9% in the fourth quarter, the data showed.

Company investment in new equipment, plant and machinery dropped 2.1% in the quarter.

Estimates of forward spending for this year eased 0.7% to a massive $164.15 billion.

And the first estimate for private investment in the 2012-13 financial year were revealed at an even larger $172.88 billion.

That's more than 28% higher than the first estimate for the current financial year, an indication that the boom remains solidly on track.

Manufacturing investment this year is forecast to rise 3.4% to $13.334 billion, but the first estimate for 2012-13 shows an 8.1% drop to $10.6 billion as the impact of the cuts and high dollar take their toll.

On Wednesday, the ABS said the value of construction work done in the December quarter dipped 4.7%, but that was after the record 12.5% surge in the three months to September.

Spending in this area remains more than 9% above where it was in 2010.

Building approvals showed a small rise in total approvals in January, thanks to a big rise in NSW in non-private dwellings.

That means there was a surge in council approvals for apartments and townhouses as backlogs were cleared from the end of 2011.

The Australian Bureau of Statistics said the number of dwellings approved rose 0.9% in January 2012, in seasonally adjusted terms, following a fall of 0.8% in December.

However, the number of approvals is still 14.6% under where they were at the start of 2011.

On Wednesday we saw retail sales up 0.3% in January, seasonally adjusted, lending data from the RBA showing sluggish growth for the same month, and weak new home sales.

In fact the economy is right where it was at the end of last year when the RBA described it as growing "around trend".

Plenty of jobs seem to be disappearing by the day, but not too many people are concentrating on finding out where the new jobs are until the monthly jobs reports from the ANZ bank and then the Australian Bureau of Statistics.

Of all the reports on manufacturing released on the first of each month, the most important for Australia (and the rest of the world) is the two surveys from China.

Yesterday two the duo, one government, one private, suggest a mild improvement in Chinese manufacturing activity last month, even though underling data showed higher prices and weak new orders.

That suggests a sluggish economy, which should be no surprise given the carry over impact of January's Lunar New Year and weak property prices and lending growth by banks.

The official Purchasing Managers' Index (PMI) for February rose to 51.0 on the 100-point scale, up from 50.5 in January, according to the government-backed China Federation of Logistics & Purchasing.

The result is just above the 50 mark that separates expansion from contraction.

However the private survey from HSBC's showed activity just under the 50 level, even though it also showed improvement, with a rise to 49.6 from the 48.8 recorded in January.

HSBC's survey highlighted weakening in new orders and anecdotal evidence that pointed to a slowdown in new exports.

"Despite the marginal improvement in the headline PMI - led by quickening production and a recovery of hiring after the Chinese New Year - deteriorating external demand is adding more downside risks to growth in the absence of a strong comeback in domestic demand," HSBC economist Hongbin Qu said in a statement accompanying the PMI data.

The government's new export orders sub-index rose to 51.1 in February, indicating expansion for the first time in four months and the highest reading since 51.1 in May 2011. New export orders were shrinking in January, when the index was 46.9.

The official PMI, which is weighted more towards big state firms, generally paints a rosier picture of Chinese factories than the PMI produced by HSBC, which includes small private firms that have been hit harder by credit curbs and weaker demand.