The recent strong surge in business confidence has ended with the National Australia Bank reporting a small dip in the September reading today.

At the same time, the bank said its quarterly survey of business had also confirmed that business conditions were also weaker, thanks to lower sales and profits and, but that was offset by a stronger outlook for labour.

The bank said the survey was done before last Tuesday’s rate rise and Thursday’s strong September labour force numbers.

Having seen a remarkable surge in confidence in the past six months, it was probably inevitable that some weakening was due.

Certainly our view was, and still is, that the readings for confidence are somewhat “unrealistic” — especially when compared to actual business conditions. In that context the 4-point fall in confidence in September is relatively moderate.

The survey showed that business confidence, after the recent surge, fell 4 points to +14 points in September — “albeit still above the longer average level,” the NAB said.

That reading predated the RBA rate decision last week. The fall was heavily concentrated in manufacturing, wholesale and the retail sectors. The only sector to strengthen was construction (probably infrastructure related).

Business conditions edged lower — down a point to +3 index points (still a touch below the long run average readings). That reading however reflected more significant falls in trading (down 4 to +8 points) and especially profitability (down 7 to +4 points).

The offset was a surprisingly strong reading for employment (up 10 to -1 index points). The readings across industries were again mixed. Manufacturing, finance and mining were strong improvers (no doubt reflecting global developments and local infrastructure demands) while wholesale and transport fell heavily.

Construction fell moderately and retail was flat. Overall suggesting softness in cyclical sectors as the stimulus to consumers fades.

The NAB said that wage pressures “were still low” despite the stronger outlook for labour.

Purchase costs continue to track down (high AUD). Importantly, retail prices slowing sharply — the lowest reading since 1997.

Forward orders also stronger — mainly mining, manufacturing and infrastructure. But no change in economy-wide capacity utilisation and de-stocking continues. Survey is consistent with strong domestic demand (near 4% annualised), activity likely to increase only marginally in Q3.

The bank said its domestic economic growth remained unchanged.

We still expect a flat H2, meaning growth of 0.6% in 2009 and 2.1% in 2010 (albeit that implies growth of 3% through the year — much the same as the RBA).

Unemployment still to peak at 6.7% in mid/late 2010 with core inflation at around 2%.

The bank said it saw the Reserve Bank continuing to move rates — “we expect another 50 points by year end. Our longer term rate path unchanged — implying 4¼% by end 2010 and 5½% by end 2011.”