Australia's Business Indicators data delivered contrasting details for the key inputs that will feed into Wednesday's economic growth figures for the September quarter. Sales volumes - a gauge of domestic demand - rose at a respectable pace (0.5%), and wage incomes also recorded solid growth (1.5%) in a good sign for the labour market. However, inventories - the component that headlines the report - look likely to weigh on quarterly GDP growth (barring an offsetting contribution from public sector inventories in data due tomorrow). Meanwhile, business profits were materially weaker than expected.
Sales volumes advanced by 0.5% in the September quarter following an upwardly revised rise of 0.7% in the June quarter (from an initial 0.5%). That equates to growth of 1.2% across the past two quarters - a clear sign of a recovery in domestic demand. The last time sales had this sort of momentum was three years ago, a period still very much driven by the pandemic recovery.
As the chart below shows, sales in Q3 (green bars) rose in the vast majority of categories, following increases in Q2 (gold bars). However, sales growth generally slowed compared to Q2 - notably evident in discretionary demand categories, such as hospitality, arts and recreation, and retail.
That backdrop of growing demand typically sees inventory levels fall. This was broadly the case in Q3, except that it was accentuated by a large decline in mining sector inventories (-4.8%). This may indicate overseas shipments picked up, but tomorrow's balance of payments data should shed more light on the matter. Overall, inventory levels fell by 0.9% compared to the previous quarter, a big downside surprise on market expectations for no change. Based on disclosed form, that suggests private non-farm inventories will deduct 0.3ppt from GDP growth in Q3. The total contribution to growth from inventories however also includes public sector inventories, and that data will come through tomorrow.
Business profits disappointed in the quarter. On a headline basis, profits were flat (0%) in Q3 against expectations for a 1.5% rise; however, they fell by 1.3% after inventory valuation adjustments - this being a closer guide to what the National Accounts will report. Mining sector profits - often volatile from one quarter to the next - rose by just 0.2%, offsetting a 0.2% fall for the non-mining sector. All told, business profits are up 1.1% through the year, but they have fallen slightly (-0.8%) after inventory adjustment. The latter suggests that companies have been prepared to absorb some cost pressures within their profit margins, perhaps wary of the durability of the pick-up in demand they have seen.
Wage incomes rose by 1.5% in the quarter, maintaining a similar pace through the past year or so. Annual growth firmed from 6% to 6.3%, its fastest since Q1 2024. Overall, this suggests labour market conditions still remain fairly robust, despite the unemployment rate having trended up since the start of the year.
In the latest quarter, the fastest growth in wages was in the financial and insurance services industry (5.8%). The weakest was notably in professional services (-1%), possibly due to firms pausing hiring in that sector.