Consumer confidence holds near highs

  • Consumer confidence has consolidated near historic highs over the past month. The weekly Roy Morgan Consumer Confidence rating stood at 127.9 at the end of January, up 0.1 points from the start of the month.

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  • Investors don't need to wait for the Westpac/Melbourne Institute survey to track consumer sentiment as the Roy Morgan survey is published weekly and both surveys have tracked each other closely over time.

What does it all mean?

  • One indicator that has been flying under the radar for some time is Roy Morgan's weekly reading of consumer confidence. Given that it closely tracks the higher profile, monthly survey of consumer sentiment conducted by Westpac and Melbourne Institute - and is timelier - it is odd that the Roy Morgan survey doesn't get greater prominence. Both surveys employ similar sample sizes and similar methodologies. And, as you would expect, results are also similar.

  • The good news is that consumer confidence held at historically high levels over January, supported by higher home and share prices, optimism about the economic outlook and indications of a stronger job market.

  • It is likely that the Melbourne Institute index of consumer sentiment for February, released on Wednesday, will show similar trends to the Roy Morgan survey, showing confidence easing slightly over the month from historically high levels.

  • In mid January, consumer confidence hit a 'sweet spot' posting one of the highest readings in the 37-year history of the series. But looking ahead consumers expect that conditions will soften - no doubt in response to forecasts of higher interest rates.

  • Investors and analysts who seek timely readings of consumer confidence will be well served by tracking the Roy Morgan series each week. While it is essential to filter any 'noise' and focus on the longer-run trends, the weekly data ensures that investors stay on top of current trends.

What do the figures show?

  • The Roy Morgan Consumer Confidence rating eased 0.3 points to 127.9 in the latest week (January 30, 31) after falling by 1.8 points in the previous week. The Consumer Confidence rating is up 36.9 per cent on a year ago.

  • The index reading that was set on January 15/16 of 130.0 was the highest since February 2005 and the fourth highest in records going back to 1973.

  • Three of the five components of the index eased in the latest week.

  • The estimate of family finances compared with a year ago rose from -1 to +6;

  • The estimate of family finances over the next year fell from +35 to +29;

  • Economic conditions over the next 12 months fell from +31 to +30;

  • The measure of economic conditions over the next five years rose from +37 to +38;

  • The measure on whether it was a good time to buy a major household item eased from +38 to +37.

What is the importance of the economic data?

  • Roy Morgan issues its Consumer Confidence rating each week. The survey is aggregated from responses to questions on the current and likely future state of family finances, current and likely future state of the economy and whether it is a good time to buy a major household item. The survey has been conducted since 1973. Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

  • Consumers are optimistic, but that is not being translated in sharply higher spending levels. Last year's US financial crisis is still uppermost in most minds, causing consumers to keep a tight leash on budgets. Aussie consumers are still only tending to spend when goods are on 'special'.

  • The conservatism of consumers will keep downward pressure on retail margins and prices.

  • The Reserve Bank notes that consumers are in good spirits at present, but also notes the restraint in consumer spending. If current trends continue then the Reserve Bank would be happy to stay on the interest rate sidelines for a little longer.

Source Craig James, Chief Economist, CommSec