Reserve Bank of Australia statements have for some time referred to uncertainty about consumer spending:
A significant source of uncertainty continues to be the outlook for household consumption. The combination of higher interest rates, cost-of-living pressures and the earlier decline in housing prices is leading to a substantial slowing in household spending. While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances.
Governor’s statement on the monetary policy decision, 2 May 2023.
The purpose of our research into leading indicators for household consumption expenditure aims to reduce this uncertainty.
Household consumption expenditure represents 55% of GDP, so a leading indicator for the former is also a partial leading indicator for the latter.
Rising interest rates have a complex set of influences on consumer spending. Some are mentioned in the RBA statement. Others include the fact that considerable numbers of people have savings and little or no debt. They benefit from higher interest rates and are able to spend more as rates rise.
In addition to the many complexities of interest rate impacts, we are also now in a high inflation environment, the worst in over 30 years. Economic models will be subject to inaccuracy in this environment because they are not calibrated on such an environment in the modern economy. Our economy was very different 30 years ago.
We infer the future of consumer spending from surveys of consumers who are living in this economic environment. Their reactions and expectations are the best source of information about the future.
Our leading indicator predicts very sluggish consumer spending in the June quarter and September quarter of 2023 (data for the June quarter will not be compiled and released until early September).
We have also developed a leading indicator for retail sales volume, which predicts continued recession in the September quarter.
Our leading indicator models will assist forecasters to make more accurate forecasts and help consumer marketers make more profitable decision concerning stock, pricing, and targeting.
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