• The fall in consumer sentiment over May follows a fall of 5.1% in April.
• Despite the rate cut in May, and April’s solid jobs numbers, sentiment appears to have been dampened by a negative response to the federal budget.
• The fall in consumer sentiment took the index below 100 for the time since October 2012 (a level below 100 indicates that the number of pessimists outweighs the number of optimists).
• The time a dwelling index surged 11.2% over the month, courtesy of a record low cash rate.

Summary
The Westpac‑Melbourne Institute Index of Consumer Sentiment fell by 7.0% in May.  The fall was the biggest monthly fall in seventeen months.  Sentiment is just 2.4% higher than it was a year ago.  The monthly move took the index to 97.6, which means that the number of pessimists outweighs the number of optimists.

The poor result can be largely attributed to a negative consumer response to the federal budget.  Since the last reading of consumer sentiment in April, there has been an interest rate cut and some better‑than‑expected jobs numbers.

Under normal circumstances these two positive factors would point to a positive consumer sentiment outcome.  But they were overshadowed by a federal budget which had little in the way of handouts to households.  There is also a general perception that “deficits are bad” among consumers. 

So while running moderate deficits over the next couple of years is appropriate policy in the context of the multi‑speed economic environment, the consumer reaction to deficits is underwhelming.  There has also been a pronounced and publicised fall in the Australian dollar over the past month. 

A dip in the local currency is welcomed by businesses.  But consumers see it a little differently as a weaker domestic currency pushes up both the price of an overseas holiday and the cost of international online shopping.  But perhaps more importantly for sentiment, consumers perceive a fall in the currency as a sign of economic weakness.

All of the five sub‑components of the headline index fell in May.  The component index reflecting economic conditions over the next 12 months fell by 13.4%.  This was followed by family finances versus a year ago (‑8.0%), and family finances for the next 12 months (‑7.0%).  The latter, however, is up 7.5% on a year ago and sits just above 100.  Economic conditions over the next 4 years was down 6.9%, while the good or bad time to buy major household items nudged down 1.3%.

Across the States, the results were uniform in direction, but mixed in magnitude.  Sentiment was down the most in the mining states.  Qld fell by a whopping 16.6% and WA was down 11.1%.  There were also falls in Vic (‑7.4%), SA (‑3.0%) and NSW (‑1.5%).  But despite the falls in sentiment, consumers feel it’s a good time to buy a dwelling. 

The time to buy a dwelling index surged in WA (+22.1%) and was also up in NSW (+13.7%), SA (+10.9%), Qld (+8.6%), and Vic (+4.6%).  So despite the perception that economic conditions will get worse over the next twelve months, consumers feel it’s a good time to take advantage of lower rates to buy a dwelling.  This has been most recently reflected in a pick‑up in the housing finance data.

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