By Greg Peel

National Bank's index of business confidence registered a score of 5 in May, fell to 4 in June, and has now fallen another 2 points to 2 points in July. To put that into context, the index was marking low teens pre-GFC, around minus 30 as we entered 2009 feeling fearful and around 20 as we entered 2010 feeling relieved.

It is not that much of a stretch to understand why confidence has gone into retreat once more, given Europe, forced slowing in China and a US economy clearly slowing alarmingly. However, the NAB economists had convinced themselves the watering down of the Resources Super Profits Tax into the less onerous Mineral Resource Rent Tax would reignite enough confidence the mining and peripheral sectors to kick the net index back above the June number, yet it wasn't to be.

The mining sector component did register an improved 25 points but the impact came from everywhere else, namely dour outlooks in the manufacturing, construction and retail sectors. The business conditions index fell to 3 in July from 7 in June, impacted by net results in the trading segment of a 33% fall from 12 in June to 8 in July and in the profitability segment of 40% from 5 to 2.

I've said it before and I'll say it again. The Australian mining industry is in a boom – everyone else is now entering a third financial year of recession. Emergency fiscal and monetary stimulus measures did no more than put the bulk of the economy on a ventilator. The ventilator is now removed and the economy is quietly suffocating. Of the three PMIs (activity indicators) released last week, only manufacturing registered expansion. Both the services and construction industries remain in contraction.

The same problems are being felt in the US, albeit the US economy is not nearly as heavily weighted towards its resource sector.

The positive manufacturing PMI also now appears under threat, NAB warns, given July's survey suggests a sharp deterioration in conditions. Then there's retail, which at an individual sector conditions measure of minus 8 is now back at March 2009 numbers (just before the rally).

Sector confidence and conditions are becoming increasingly disparate, notes NAB. Aside from mining, the transport and utilities sectors noted improved confidence. But it is the manufacturing, construction and retail sectors for which NAB is most fearful, given a dramatic slump in the new orders index from plus 14 to minus 8 in the month. Businesses are running down inventories rather than reordering with confidence. No one wants to get stuck with unsold stock. This is particularly the case for retailers, who seem to have been in an endless “sale” since June.

New orders is a lead indicator, as is capacity utilisation (call that factories open for business) and capital expenditure (call that investment in expansion). Capacity utilisation did tick up from 82.1% to 82.3% in July, but the capex index fell from plus five to plus one.

All up, not a very encouraging result at a time our own sad pollies are arguing whether stimulus had been enough or too much and when Wall Street is looking for the Fed to start printing money again to save the US economy.

A nod also has to be given to the first signs of a fresh house price pullback emerging. While the RBA will be pleased, given its fears of a housing bubble, the big drop in home loans in June reported yesterday and a ticking down of recent house price indices are not welcome harbingers for the average Australian, and retailers, in particular, will be looking on with despair.

And on August 23 – the first working day after the election – watch the banks independently raise their mortgage rates to recover rising funding costs.

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