Red Book: One nervous consumer

Westpac’s September Red Book is out and is unhappy reading for those expecting a renewed consumer boom to drive economic growth. Here are the crucial charts:

― The Westpac–Melbourne Institute Index of Consumer Sentiment fell 4.6% in Sep reversing most of the recovery from May’s post-Budget fall. At 94.0, the Index is back in ‘cautiously pessimistic’ levels, 5.8% below the ‘neutral’ level that prevailed immediately prior to the Budget.

― Consumer views on the economic outlook recorded particularly large falls in Sep, the sub-index tracking 12mth expectations declining 8.2% and the sub-index tracking 5yr expectations down 9.2%. The latter is of particular concern as this sub-index is typically fairly stable and the Sep fall takes it to a 16yr low.

― Additional questions on news recall highlight how ‘Budget and tax’ issues continue to dominate with the second highest level of recall of news on this topic in the history of the series back to 1975 – the highest being Jun’s reading. Note that Sep saw repeal of the mining tax announced. However, the news on this and other topics with high recall continues to be viewed as predominantly negative.

― CSI±, our modifi ed sentiment indicator that we favour as a guide to actual spending, recorded a somewhat milder 1.9% decline in Sep. It continues to point to improved but still weak growth in consumer spending. Current readings are consistent with fl at spending in per capita terms.

― The sub-index on ‘time to buy a major item’ fell 1.9%, dipping back below average. Spending on durables has slowed in the fi rst half of 2014 after a promising pick-up in 2013. Although latest monthly data suggests positive momentum is still elusive, current levels of‘time to buy’ suggest spending on durables and cars should improve by year end.

― Consumer views on housing remain mixed. The ‘time to buy a dwelling’ index fell 8.7%, taking it back to the low end of the range that has prevailed since May. Buyer sentiment remains consistent with cooling activity and is notably weaker in NSW and amongst those in first home buyer age-groups.

― Consumers expect strong house price growth to continue. The Westpac Melbourne Institute House Price Expectations Index rose 1.9% in Sep, building on a strong rise in Aug. At 156.4 the Index is well above its long run average and broadly consistent with expectations of price gain nationally of close to 10%yr. That said, actual price growth has moderated in the year to date 2014 and consumers were slow detect the slowdown in 2010-11.

― The Sep survey included an update of questions on the ‘wisest place for savings’ used to construct the Westpac Consumer Risk Aversion Index. The results show a further slight shift towards risk aversion although attitudes remain much more relaxed than in early 2013. Household savings rates have remained steady at relatively high levels in the year to date.

― The Westpac-Melbourne Institute Unemployment Expectations Index rose 2.1% in Sep, a slight deterioration (recall that higher readings mean more consumers expect unemployment to rise in the year ahead). Job loss fears remain heightened despite signs of improvement from business surveys and offi cial jobs data, although we are not convinced of the spectacular gains shown the Aug labour force report. The Q2 national accounts suggest elevated job loss fears are weighing on the most ‘cyclical’ components of consumer spending.

This looks like a worrying survey to me because:

• the five year economic outlook is at its lowest since 1998,
• time to buy a house is crashing which says to me the bubble is worrying everyone, and
• the saving impulse is climbing.

This is a consumer preparing to bunker not spend.