Attitude: Does a little thing make a big difference? An analysis of the Westpac-Melbourne Institute consumer sentiment index and its component indices Danielle Brooker

Outline Significance of consumer sentiment surveys Westpac-Melbourne Institute consumer sentiment survey Recent trends Purpose of the research Methodology Key results

Consumer sentiment Link between future and present economic activity Indicators of growth and spending Assist decision making In the context of the global financial crisis, watched closely by economists

Westpac-Melbourne Institute Consumer Sentiment Survey Conducted over a period of four days in the first half of the month 1200 respondents Available three months before release of official economic indicators

Westpac-Melbourne Institute Consumer Sentiment Survey Five questions: Current and prospective household financial situation 12 month and 5 year economic outlook Current buying conditions for major household items Reflects respondents’ views Index is unweighted average of the five components Net balance of positive and negative responses

Recent trends Mostly experienced falls since January 2008 Index remained below 100 from February 2008 to May 2009 However, for the past four months the index has risen and stayed above the 100 mark The latest results show that sentiment rose by 5.2 per cent in September 2009 to index points

Consumer sentiment index 11 per cent fall from Sep to Oct 2008 Increased for the past four months

Leading characteristics Preliminary graphical analysis shows that consumer sentiment appears to lead changes in GDP Consumption expenditure accounts for almost 60 per cent of GDP on average Component indices are expected to show the strongest relationship with changes in consumption expenditure

Leading characteristics

Purpose of the research Analyse extent to which component indices are indicators of economic growth, consumption and other economic variables Identify leading or lagging characteristics Extends past research Includes most recently available data Initial effects of the global financial crisis

Component indices FIN: Family finances compared to a year ago FIN12: Family finances for the next 12 months ECON: Economic conditions for the next 5 years ECON12: Economic conditions for the next 12 months HH: Time to buy household items

Economic indicators Private consumption expenditure Average weekly earnings Disposable income Consumer price index Variable mortgage rates Price return on all ordinaries index Petrol prices House prices GDP Unemployment rate Exchange rate

Theoretical specification Consumer sentiment index (CSI) = f(GDP, UE, CPI, I, WAGE, YD, ER), where GDP = growth in real gross domestic product UE = unemployed rate CPI = consumer price index i = interest rate WAGE = wage rate YD = average disposable income ER = exchange rate Where CSI = [FIN + HH + FIN12 + ECON12 + ECON] / 5

Methodology June quarter 1980 – March quarter 2009 Simple regression analysis Tested for up to four leads and lags Expected relationships and signs Main analysis focussed on simple statistical interpretations of t statistics, p values, R 2

Expected relationships Expected relationship between private consumption expenditure and the ‘financial situation’ index Better-off compared to a year ago Confidence in finances improved More likely to increase consumption (available finances) Increased consumption expenditure

Results

Financial situation compared to a year ago Correlated best with: Current disposable income Future consumer prices Future mortgage rates Future consumption expenditure Dependent variableIndependent variableLead (quarters) Family finances compared to a year ago disposable incomecurrent 1 consumer price index2 3 consumption1 2 mortgage rates3

Financial situation compared to a year ago Best indicator of consumption if lagged by one to two quarters Can be explained by cumulative effect of consumers’ behaviour The better they ‘feel’ about financial circumstances, the more likely they are to consume goods and services Consumers may also be forward looking

The financial situation compared to a year ago and private consumption expenditure

Financial situation in 12 months Correlated best with: Future disposable income Future private consumption expenditure Consumption expenditure: shows that deterioration in consumers’ outlook for financial conditions will affect consumption in three quarters time Dependent variableIndependent variableLead (quarters) Family finances for the next 12 months disposable income3 consumption3

The financial situation in 12 months and private consumption expenditure

Economic situation in 5 years Correlated best with: GDP Unemployment rate Consumption expenditure Dependent variableIndependent variableLead (quarters) Economic conditions for the next 5 years GDP2 3 consumption3 4 unemployment3

Economic situation in 5 years and change in gross domestic product

Economic situation in 12 months Correlated best with: GDP Consumption expenditure Unemployment rate Consumer price index Exchange rates Dependent variableIndependent variableLead (quarters) Economic conditions for the next 12 months GDP1 2 consumption3 unemployment2 3 consumer price index4 exchange ratescurrent

Economic situation in 12 months and change in gross domestic product

Time to buy household items Correlated best with: Consumption expenditure Disposable income House prices Dependent variableIndependent variableLead (quarters) Time to buy household items consumption3 4 disposable income4 house prices2 3

The time to buy household goods and consumption expenditure

Summary Component indices provide useful indicators of economic variables Leading characteristics Most significant relationship with consumption expenditure Further research

Survey questions Q1 Financial Situation First about how people are getting along financially these days? Would you say you and your family are better-off financially or worse-off than you were at this time last year? 1. Better-off 2. Same 3. Worse-off 4. Uncertain/Don’t Know/It depends

Q2 Future Financial Situation Looking ahead to this time next year. Do you expect you and your family to be better-off financially, or worse-off, or about the same as now? 1. Better-off 2. Same 3. Worse-off 4. Uncertain/Don’t Know/It depends

Q3 Future Economic Conditions Thinking of economic conditions in Australia as a whole. During the next 12 months, do you expect we’ll have good times financially, or bad times, or what? 1. Good times 2. Good with qualifications 3. Some good, some bad 4. Bad with qualifications 5. Bad times 6. Uncertain/Don’t Know/It depends

Q4 Five-Year Economic Forecast [ECON] Looking ahead, what would you say is more likely? That in Australia as a whole, we’ll have continuous good times during the next five years or so, or we’ll have some bad times—or what? 1. Continuous good times 2. Good with qualifications 3. Some good, some bad 4. Some bad with qualifications 5. Some bad times 6. Uncertain/Don’t Know/It depends

Q5 Consumer Buying Intentions Next, about the major things people buy for their homes. Speaking generally, do you think now is a good time or a bad time, for people to buy major household items? 1. Good 2. Some good, some bad 3. Bad 4. Don’t know/Uncertain