The Economy: Strengthening, With Retail Sales Solid

More evidence yesterday that the economy is stronger than many people think with a solid rise in retail sales in September and in the third quarter.

While the headline figure for building approvals in September fell sharply, privately owned dwelling approvals was again higher.

And private credit rose in the month as well, up an annual 3.4% in the year to September, the highest annual rate since March and the fourth successive monthly increase.

The latest ABS Retail Trade figures show that Australian retail turnover rose 0.4% in September 2011, seasonally adjusted.

After rises of 0.6% in August and the same in July, retail sales in the September quarter was the strongest it has been for 15 months.

With inflation stripped out, retail sales strengthened throughout 2011, rising 0.6% in the third quarter, from a revised 0.2% in the second quarter and 0.3% in the first quarter.

The ABS said retail turnover rose in all industries:

Household goods retailing saw a 1% rise, Cafes, restaurants and takeaway food services (0.9%), Food retailing (0.2%), Other retailing (0.3%), Clothing, footwear and personal accessory retailing (0.1%) and Department stores (0.1%).

Turnover rose in NSW (0.6%), Queensland (0.5%), South Australia (1.0%), the Australian Capital Territory (1.7%), Tasmania (0.8%), Western Australia (0.1%) and the Northern Territory (1.0%). Victoria (0.0%) was relatively unchanged.

Trend turnover rose 0.3% in September 2011. This follows a rise of 0.3% in August 2011 and a rise of 0.3% in July 2011.

The strength seems to be coming from basic retailing.

Adjusted for inflation, clothing, footwear and personal accessory sales tumbled 8% in the September quarter, seasonally adjusted, which was one of the largest quarterly falls recorded.

Department stores sank 2.3%, as we have seen from the weak first quarter updates from Target, Kmart and Big W and commentary about the poor start to the current year from David Jones and Myer.

Cafes, restaurants and takeaway food services rose 1.2% in the quarter, while food retailing was up 1.4%.

And household goods sales rose 1.5%, seasonally adjusted.

The 0.6% rise in volume terms should mean a positive contribution to growth from retailing for the September quarter national accounts.

As the Reserve Bank has been pointing out, the latest Household Expenditure Survey has shown consumers are changing their spending patterns and moving away from things like clothing and footwear and department stores and more towards services and recreation and entertainment.

But while the huge retail sector was solid in September, the wider services sector had a rough October.

Activity in the Australian services sector contracted in October as sales weakened and new orders fell, a private survey shows.

That's contrary to the solid improvement seen earlier in the week for manufacturing.

The Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (PSI) fell 1.5 points to 48.8 points in October.

A reading above 50 indicates an increase in activity.

Commonwealth Bank senior economist John Peters said the survey result reflected the patchy nature of the Australian economy and the negative impact of the strong Australian dollar.

"Consumer and business confidence continues to be sapped by the sovereign debt turmoil in Euroland. In particular, consumers remain very cautious about the future," Mr Peters said in a statement.

Mr Peters said the RBA's interest rate cut from 4.75% to 4.5% should help the sector.

And while we saw a fall in building approvals in September, that should be ignored because the volatile other dwelling segment was responsible for the 13.6% drop, after the 10.7% increase in August.

That volatility was seen in the 30.7% fall in private sector other dwellings in September, which all but reversed a 32% jump in August.

Better news was that approvals for private houses rose 1.1% in September, more than reversing the 1% fall in August.

(They were down 7.6% in the year to September, which is better than the 13% fall in the year for private other dwellings.)

On an annual basis, total building approvals sank by 12% in the month, after a revised 5.3% fall in August. Analysts had tipped a 0.1% rise in the month.

Approvals for private sector houses jumped 3.9% in NSW and 2.1% in Victoria. They fell 1.3% in Queensland, 1.2% in South Australia and 0.7% in WA.

The total value of building approvals fell 13.3% in September, seasonally adjusted, after a 14.6% rise in August.

The value of residential building dropped 9.4% in September, according to the ABS.

On a state-by-state basis, overall building approvals - comprising all types of construction - tumbled 32.2% in NSW, Victoria's dropped 13.6 %, Tasmania's fell 4.8%, while in WA they were only down 1.4%. In South Australia they were up 11.3%.