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In the run-up to Q4 GDP on Wednesday, we received various partial indicators for economic growth. Today’s release focuses on activity across large parts of the business sector. We will receive more partial indicators tomorrow (net exports, public demand) which will help us hone our Q4 GDP nowcast.

Private non-farm business inventories increased by 0.1% in the December quarter. This was broadly in line with the consensus estimate for a flat result but firmer than Westpac’s expectation of a 0.8% decline – noting that there was a wide array of forecasts, ranging from –1.2% to +0.7% in the quarter.

The net effect is that business inventories will be a positive contributor to growth, adding +0.3ppts to GDP based on our forecasts for the rest of aggregate demand. We had anticipated that businesses would continue to meet consumer demand by running down their inventory stock into year-end. This may suggest that sales (while positive) were not as firm as businesses expected, resulting in a modest inventory build-up and a tick-down in the inventory-to-sales ratio.

Total sales volumes rose 0.3% in the December quarter. There were also some notable revisions to recent history, largely confined to retail trade for the June and September quarters. Overall, this saw annual growth in total sales (up to September) revised up from –0.2%yr to +0.3%yr.

This provides us with a very general guide as to what we might me expect for private demand, with today’s update suggesting that it continues to gradually recover against a backdrop of moderating inflation and tax cuts. However, we caution that this is by no means an accurate indicator for private demand on a quarter-to-quarter basis, and nor is it a direct input into the expenditure estimates for the National Accounts.

Headline company profits surprised materially to the upside, rising 5.9% in the December quarter, well exceeding our forecast (1.0%), the market median (1.8%), and even the highest forecast in the range (3.5%).

One of the main reasons for this larger-than-expected increase is the treatment of changes in the prices of inventories, called the IVA (inventory valuation adjustment). Being an accounting survey, this data incorporates IVA into the profit measure, but in an economic sense, IVA does not represent a true change in profitability. This has been a more prominent issue in recent times with significant quarter-to-quarter shifts in the IVA driving large swings in accounting profit measures in this survey. Today’s data revealed that the IVA added +$1.7bn to total profits in Q4, compared to subtracting –$1.6bn in Q3.

After adjusting for this dynamic, we calculate that the increase in profits was closer to 3.2%. The ABS also employs slightly different seasonal factors between the gross operating profits in this data and the official measure of gross operating surplus in the National Accounts.

Nominal wages growth, which measures the total wages bill (that is, hours worked multiplied by wages), rose by a solid 1.4% in Q4. The gains over the second half of the year far outstripped the gains seen in the first half, seeing the six-month annualised pace pick up from 3.5%yr in June to 5.9%yr in December. Note that this measure is ‘before tax’, so it is not directly affected by the ‘Stage 3’ tax cuts rolled out in July.

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