What it means
Official statistics such as growth and employment arrive with a delay. A survey of business sentiment arrives more quickly, because it asks managers directly what they are seeing and expecting.
NAB's monthly survey covers many firms across industries and regions, and it publishes headline results on business conditions and business confidence. Business conditions describe how firms say they are doing now, including sales, profits and hiring.
Business confidence is about expectations, meaning how firms feel about the outlook. The two can move apart, for instance when conditions are good but managers worry about future rate rises.
The result is reported as a net balance, which is the percentage of firms expecting better conditions minus the percentage expecting worse conditions. The figure can be positive or negative, and it is usually shown as an index in points.
Because it is a balance, it measures the direction of sentiment, not the size of any change in the economy. Why does it matter for business readers?
Sentiment influences decisions about investment, hiring and inventory, and a sustained fall in confidence may be followed by weaker spending. Central banks, analysts and treasurers use the survey alongside other data when judging the economic outlook and the likely path of interest rates.
It is not a perfect forecaster. Surveys reflect opinions, which can be swayed by headlines, politics and recent events, and the results may be revised or smoothed in analysis.
The best use is to look at the trend over several months and to compare confidence with actual data on conditions, sales and employment. The survey is often broken down by industry and by state, which makes it more useful than a single national number.
A manufacturer in one region may see very different sentiment from a services firm in another. Finance teams can compare their own sector's reading with the national figure to see whether their industry is leading or lagging.
In practice
Real-world examples.
Example
A retailer planning to open new stores sees business confidence fall for three months in a row. The finance director delays two openings and keeps more cash in reserve until the picture clears. He reviews the survey again the next month before making a final decision.
Example
An economist at a bank compares the confidence index with official employment data. She finds that when confidence dropped sharply, hiring slowed a few months later, and she uses the pattern in her forecasts. She cautions that the relationship is not exact and has weakened in some periods.
Example
A treasurer at an exporter reads the report to understand the mood among local customers. A weak reading leads her to tighten credit terms to buyers in the most affected industries. She sets the new terms for one quarter only and reviews them when the next survey is published.
Formula
Calculation
Net balance = Percentage of firms optimistic - Percentage of firms pessimistic
Suppose a survey finds 35% of firms expect conditions to improve, 40% expect them to stay the same and 25% expect them to worsen. The net balance = 35 - 25 = +10 points. If the next month shows 28% optimistic and 34% pessimistic, with 38% unchanged, the net balance = 28 - 34 = -6 points. The index has fallen 16 points, from +10 to -6, which signals a clear turn towards caution.Case study
Seen in the real world.
Southern Cross Supplies is an illustrative, fictional wholesaler serving builders and tradespeople. Its sales manager notices that orders have slowed, and the finance director checks business sentiment surveys for context.
She finds that confidence has fallen from +8 to -9 points over four months, a drop of 17 points, and that construction-related industries show the weakest readings. She reduces planned stock purchases by 10%, from $2,000,000 to $1,800,000 a quarter, saving $200,000 of cash. She also asks the sales team to confirm the picture with calls to their ten biggest customers.
Three months later, orders do weaken, and the lower stock levels spare the firm from having to discount slow-moving items. The illustrative lesson is that sentiment data can act as an early warning, but should be combined with the company's own sales figures.
Watch out
Common mistakes.
- Reading a negative number as a fall in sales, when it only means more firms are pessimistic than optimistic.
- Treating a single month as a trend, when sentiment surveys are noisy.
- Confusing business confidence with business conditions, which describe how firms are doing now.
Questions
People also ask.
What is a net balance?
It is the percentage of firms giving a positive answer minus the percentage giving a negative one.
How often is the survey published?
It is released monthly, with a more detailed quarterly version, so it provides a regular read on sentiment.
Does confidence predict the economy?
It is a useful early signal but not a reliable forecast, so it is best used alongside hard data.
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