• The 12-month rolling average of the consumer sentiment index hit a 27-month low of 99.4 in January.
• Car sales down again: New car sales fell by 2.9 per cent in seasonally adjusted terms in December, after falling by 0.6 per cent in November. The slide was largely due to a sharp fall in the sale of “other vehicles” (trucks, utes etc) which fell by 12.4 per cent.
• Overall car sales are down 3.0 per cent on a year ago. Passenger vehicle sales are down 9.3 per cent, SUVs are 24.8 per cent higher and “other vehicles” are down by 13.3 per cent.

What does it all mean?

• While consumer confidence rose over the month, the latest result can only be categorised as disappointing. There is not much more that could have gone right over the past couple of weeks to cheer up consumers. Notwithstanding a stronger Aussie dollar, rising share markets, two rate cuts and a modest improvement in the outlook for the global economy, the consumer sentiment index remains below 100, indicating that consumers are still pessimistic.
• It seems as though the ongoing global economic troubles have altered consumer perceptions and entrenched the current level of cautiousness. Overall most consumers still harbour doubts that the global financial crisis is truly over. In fact the 12-month rolling average on consumer confidence – a more smoothed longer term reading – is holding at a 27 month low.
• Consumers are clearly battening down the hatches, using savings to cut their debt levels, unwilling to take on risk and curbing spending. The latest result doesn’t bode well for retailers who have been facing tough trading conditions for some time now.
• The latest car sales result highlights the unwillingness by consumers to spend on big ticket items. Car sales are now down 3 per cent on a year ago. Overall the sector is now back on an even keel, however it will take an improvement in economic conditions to prompt consumers to commit to larger purchases.
• Certainly the underlying conditions for the car market remain positive. Unemployment is low, wages are rising and car affordability is the best since the mid-1970s. In addition a further rate cut should help to boost consumer confidence and support activity levels.
• The data over the past couple of weeks have shown no clear signs of substantial or sustainable improvement in economic conditions. And given the subdued level of confidence the Reserve Bank has plenty of scope to cut interest rates once more in February.

What do the figures show?

• The Westpac/Melbourne Institute index of consumer sentiment rose by 2.4 per cent in January after a slide of 8.4 per cent in December. The consumer sentiment index is down 7.2 per cent on a year ago. But the 12-month rolling average of the consumer sentiment index hit a 27-month low of 99.4 in January.
• The current conditions index rose by 0.5 per cent, while the expectations index rose by 3.9 per cent.
• Four of the five components of the index rose in January:
  • The estimate of family finances compared with a year ago fell by 2.5 per cent;
  • The estimate of family finances over the next year rose by 0.7 per cent;
  • Economic conditions over the next 12 months was higher by 9.5 per cent;
  • Economic conditions over the next 5 years rose by 2.4 per cent;
  • The measure on whether it was a good time to buy a major household item rose by 2.4 per cent.
• Men (index reading of 105.1) were more optimistic than women (99.4). Young people (18-24 years, index reading 118.6) are still more optimistic than older people (over 45 years; index reading of 97.6).

What is the importance of the economic data?

• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
• The Australian Bureau of Statistics (ABS) provides monthly estimates of car sales in seasonally adjusted and trend terms after receiving the actual sales data from the car industry. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

What are the implications for interest rates and investors?

• Consumers still harbour reservations about what lies ahead and if consumer sentiment doesn’t lift markedly over the next few months, retailers and policymakers alike would have a genuine reason to be very worried. CommSec expects the Reserve Bank to cut interest rates once again in February in an attempt to shore up domestic confidence.

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