CBA Economics: Consumer sentiment falls to its lowest level since May last year

Consumer Sentiment – February 2014

• Consumer sentiment fell by 3% in February to its lowest level since May last year.
• Sentiment declined for a third month in a row as expectations of further RBA interest rate cuts dissipated.
• A soft jobs market is also weighing on consumer sentiment.  The Unemployment Expectations Index rose by 2.3% in February – its sixth consecutive monthly rise.

The Westpac‑Melbourne Institute Index of Consumer Sentiment fell to 100.2 in February to sit barely in positive territory (100 means that the number of optimists equals the number of pessimists).  Sentiment is 7.5% lower than it was a year ago.  The result is in stark contrast to business confidence, which rose for the first time in four months in January.

Sentiment has trended down over the past three months.  A weak jobs market has exerted downward pressure on consumer confidence.  And this has been compounded over the past month by a lift in inflation which has ruled out the prospect of near term rate cuts.

RBA meetings always attract media attention.  And the message following last Tuesday’s meeting from RBA Governor Glenn Stevens was telling with the removal of the RBA’s mild easing bias.  Namely, that the Bank is less comfortable with the inflation outlook.  So in our view the further rate cuts are off the table.

A soft jobs market has opened up the gap between wages growth and domestic inflation.  This means that consumers feel cost of living pressures more acutely.  This has weighed on the two family finances component indices.  Recent falls in global share markets are also likely to have weighed on sentiment over the month.

Looking through the detail reveals that four of the five component indices decreased in February.  The largest falls were in the component indices about economic conditions next 12 months (‑7.1%) and 5 years (‑4.6%).  This was followed by the component index about family finances vs a year ago.

The fall in consumer sentiment goes against the sustained uptrend in retail sales observed since August – there is usually a positive correlation between the two.  The latest retail trade figures show that consumer spending at domestic retailers held up well over the Christmas period while sentiment has slid.  If we marry the sentiment figures with the retail trade figures then it looks like consumers are redirecting spending onshore due to a lower AUD rather than spending more.

The time to buy a dwelling index fell slightly over the month, most likely due to consumers registering the message from the RBA that interest rates are unlikely to fall further.

The Westpac‑Melbourne Institute unemployment expectations index was also published today. It rose by 2.3% in February and has risen in each of the past six months.  It is at a high level overall, confirming consumer fears over job security remain elevated.  Weak official jobs figures and significant media coverage around concerns over Australia’s manufacturing industry have contributed to unemployment fears.

The focus now turns to jobs figures for January, published tomorrow.