Not happy enough

Australian consumers are happier in September than last month. The Westpac-Melbourne Institute (WBC-MI) index of consumer sentiment jumped by 2.5% to a reading of 97.9 this month from 95.5 in August with nearly all the survey's sub-indices recording improvements.

But before you jump for joy and sing hallelujah, note that the September figure is a bounce back from the nine-year low recorded in the previous month and remains below 100, indicating that pessimists still outnumber optimists ... and for the 10th straight month at that.

You, I and Irene don't have to hunt for the why's and wherefore's, Westpac chief economist Bill Evans explains it succinctly: "Pressures on family finances, concerns around interest rates, deteriorating housing affordability and rising energy prices have all weighed on confidence in 2017."

This month's sentiment survey included additional questions on news recall. Here Westpac notes that consumers viewed news on all fronts as unfavourable - economic conditions; budget and taxation; interest rates; inflation; jobs and international conditions. "...consumers rated news on inflation and international conditions as much more negative than three months ago - likely reflecting sharp increases in energy costs and developments around North Korea. The only material improvement was around jobs where news was viewed much less negatively than in June."

Sentiment on jobs may have improved but this month's survey showed the unemployment expectations index rising from 132.5 in August to 133.6 - indicating expectations for higher unemployment - which is above its long-term average of 130.2.

This suggests that the hope for acceleration in wages could be a long time coming and when tied to rising energy prices, indicate further erosion in household disposable incomes that, in turn, weakens consumer spending and by extension, overall growth in the economy.

The Australian Bureau of Statistics'(ABS) 'Household Income Account' report showed that the annual growth rate in gross disposable income slowed from 2.1% in the March quarter to a near eight-year low of 2% in the June quarter.

The drag on consumer spending brought about by sluggish disposable income growth is further compounded by this month's consumer sentiment survey revealing that 23.5% of consumers prefer to "pay down debt".

Should these conditions persist, nobody could kill Bill for concluding that: "We do not expect that economic conditions in Australia in 2018 will be consistent with the need for the Bank to raise rates."

Consumer confidence

Definition: Consumer confidence is a survey of consumer attitudes concerning both the present situation as well as expectations regarding economic conditions conducted monthly by Westpac Banking Corporation (WBC) and the Melbourne Institute of Applied Economic and Social Research (MI).

The WBC-MI consumer sentiment index is derived from the average of Australian consumers' responses to:

  • Evaluations of their household financial situation over the past year, the coming year and the next five years.
  • Expected economic conditions over the coming year and the next five years.
  • Outlook on buying conditions for major household items.
Each month, WBC-MI surveys around 1200 consumers, asking them five questions.  The index is based on the weighted average response of consumers to those questions.  The questions are:
  • Is your standard of living now compared to a year ago better, worse of the same?
  • Do you think your standard of living over the next year will get better, worse or the same?
  • Do you think economic conditions over the next year will be better, worse of the same?
  • Do you think economic conditions over the next five years will be better, worse or the same?
  • Is this a good time to buy major household items?
The Westpac-MI survey also records Australian consumers' assessments of future unemployment and their expected inflation over the coming year.

Each quarter, Westpac and the Melbourne Institute also surveys consumers on their outlook for buying conditions for cars and dwellings, the wisest place for savings and consumers' recollection of domestic economic news (news recall survey).

Implications

While not perfectly correlated, the level of consumer confidence has a positive correlation with the strength of consumer spending. A high level of consumer confidence generally translates into stronger household consumption.

Consumer spending accounts for around two-thirds of the Australian economy, so markets are always trying to anticipate what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it is easy to see how this index of consumer attitudes gives insight to the direction of the economy. But note that changes in consumer confidence and retail sales do not always move in tandem month by month.

Strong consumer spending leads to strong economic growth, which in turn translates into healthy corporate profits and higher stock prices.

For bonds, the focus is on the current state of the economy and whether stronger spending leads to rising inflation.  Strong consumer spending is positive for bonds when the economy is operating below its full potential.  However, if an economy is growing above potential, unrestrained growth in consumer expenditure is negative for bonds. This is because an overheating economy puts upward stress on consumer prices (inflation), which in turn, increases pressure for higher interest rates.

Read more: AustraliaConsumer ConfidenceAustralian Bureau of StatisticsBill EvansHousehold Income AccountMelbourne Institute of Applied EconomicNorth KoreaSocial ResearchWestpac Banking Corporation
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