Last week we saw considerable evidence of boosts to confidence as a result of the Coalition's election victory. The Westpac Melbourne Institute Index of Consumer Sentiment increased by 4.7 per cent in September from 105.7 in August to 110.6 in September. It is the highest print for the Index since December 2010. The Index has now increased by a respectable 13.8 per cent since the Reserve Bank began cutting rates and it is now 9.9 per cent above its average over the period since that first rate cut.
The survey was conducted over the period September 2 to 8. It was really only the last day of the survey that covered the actual election result although media coverage pointed strongly to a Coalition victory throughout the survey period. Responses collected on the last day of the survey showed a further marked lift in sentiment, although the sample size is too small for this to be a statistically valid result. Suffice to say that the level of the Index over the first six days of the survey printed 109.7, slightly below the seven-day print of 110.6. The result is comparable with the boost to the Index in March 1996 when the Coalition was returned after 13 years in opposition. On that occasion, the Index jumped from 108.0 to 115.0 – a rise of 6.5 per cent. That survey covered March 3 to March 9 following the election a week earlier.
As a result, the whole survey covered a period when the election result was known. A concern for much of this year has been that while consumer sentiment has been steadily improving, households’ assessments of job security has remained very weak. For example, while consumer sentiment had increased by 8.7 per cent to August from the time when the Reserve Bank began cutting rates, households’ unemployment expectations had deteriorated by 9.6 per cent.
This wedge has explained some of the listlessness of consumer spending despite the improvement in consumer sentiment. For September, the Westpac Melbourne Institute Index of Unemployment Expectations fell from 152.7 to 142.6 — a 6.6 per cent improvement in this measure of job security. We are a little sceptical about this marked improvement given that it is concentrated amongst workers (down around twenty points) whereas management (down seven points), which makes the employment decisions, is much more circumspect.
However, the Index is still 2.4 per cent above the level of October 2011 indicating that households are still more concerned about rising unemployment than when the Reserve Bank first started cutting rates in November 2011. Of crucial significance will be whether these "gains" are sustained. In 1996 the Consumer Sentiment Index fell by 2.7 per cent in the month after the big election boost and fell by a total of 10 per cent over the following four months. The retracement of the Unemployment Expectations series was more serious in 1996. The series improved by 22.8 points (or 19.3 per cent) in March but retraced all those gains in April losing 25.9 points (or 27 per cent). Over the next few months, the Index deteriorated by a further 10.5 points.
The evidence from 1996 casts some doubt around the sustainability of the boost in confidence around job security. The rise in the unemployment rate from 5.7 per cent to 5.8 per cent (just below the 2009 high of 5.9 per cent) was reported the day after the release of the Consumer Sentiment Index . That is likely to unnerve respondents casting further doubt around the sustainability of the gains in job confidence.
The components of the Consumer Sentiment Index indicate that the improvement in September was dominated by rising optimism about prospects for the economy rather than how households feel about their own finances. The "economic outlook" components improved by around 8 per cent, whereas the "household finances" indexes were around flat on average. I find that how respondents feel about their own finances is a more reliable guide to spending decisions than an assessment about the economic outlook.
We had a similar mix in 1996. The "economic outlook" components boomed by 13 per cent in March but fell back in April for a modest net gain of 2.4 per cent over the two months, whereas the "household finances" components were up by only 2.5 per cent in March and lost ground (–0.5 per cent) in April. A retracement in the "economic outlook" components of the Index seems highly likely for the October print of the Index.
There is a similar story around boom and retracement in the business sector. The NAB business survey reported a sharp bounce in business confidence from –3 in July to 6 in August (survey in the field to September 3). In 1996 (then a quarterly survey), confidence bounced from 0.7 in December to 12.4 in March with a pull back to 7.6 in June. Consistent with the observation around Consumer Sentiment, business conditions (how respondents assess their own business) only edged up by 1 point from –7 to –6. In 1996 "business conditions" improved modestly from –5.1 to –2.6 but the "gains" were lost by September retracing to –5.6.
For the buoyant confidence to be sustained, business conditions need to improve or confidence levels apparently retreat. For Australia, low business confidence is constraining investment and hiring decisions. Households in turn are nervous about job security and focused on deleveraging. That dynamic has largely explained the tepid growth in consumer spending (up 1.8 per cent in the year to June 2013, the weakest since 2008) which, along with weak non-mining business investment, had constrained the Australian economy.
These twin forces of job insecurity and deleveraging are also likely to contain any property excesses, reducing prospects for a nationwide unsustainable property boom. The RBA will be keen to assess the resilience of these confidence measures. Monthly updates will be available before the November board meeting when we expect another rate cut. However, these confidence measures do increase the risks that the Bank may be slower to move on rates than earlier expected. However, at this stage, we retain our call for a rate cut in November.