Why Consumer Indicators are critical for your trading strategy
As an economy matures, the prominence of consumer spending becomes increasingly important. That’s why economic data that measures consumer spending and confidence deserves your attention.
According to the World Bank, household consumption accounts for around 68% of GDP in the US, and around 66% in the UK.
When considering the services sector as a whole, these proportions increase to around 80%. The industry makes up a relatively small proportion of the economy. So for both the US and UK, the consumer outlook is vital, and indicators that reflect this are considered to be very important.
In recent years, one of the big global economic stories has been the rebalancing of the Chinese economy. China has been structurally shifting away from being an investment heavy, export and manufacturing-driven economy; and re-orienting the toward a more consumer-based economy.
In 2018, household consumption only generated around 39% of GDP in China (from approximately 35% in 2010). The outlook, however, is already changing rapidly. The services sector accounts for around 52% of GDP (about 48% being industry and construction). This rebalance has further to go, and in the years ahead of the services data will provide an increasingly important view of the transition. For now, both consumer and industrial data hold similar weighting for China.
In Germany, industry and export are still critical economic factors, and consumer spending is less prominent than the US or UK. German household consumption drives around 52% of GDP, with the broader services sector around 62%. When looking at German data (which by extension impacts on the Eurozone), as with China, there is a relatively equal weighting given to industrial and consumer indicators.
Consumer spending can have a significant impact on the performance of domestic investments such as currencies, bonds and equities. The scale of the impact will vary from country to country.
The impact of positive data surprises on consumer indicators
As ever, an active reading on a consumer indicator will have a hawkish impact on expectations of monetary policy.
With US consumer data, all things being equal, a positive surprise on the consensus expectations will therefore be:
- Positive for US Treasury yields
- Bullish for the US dollar
- Strong for equities (primarily the consumer-driven sectors).
Box Out: Aspects of consumer data
There are a variety of indicators that determine the consumer outlook:
- Consumer spending – are“hard” data on historical expenditures. Retail Sales are predominantly of interest.
- Consumer surveys – are“soft” data that helps to predict current and future spending. Confidence surveys are keenly watched.
Housing market indicators also deserve a look. Although housing data are not strictly consumer indicators, they still have a key role to play.
Retail Sales provide a broad measure of consumer spending patterns in an economy. As an indicator, it provides an essential snapshot of the health of the economy. People tend to spend more when they are feeling more confident about their wealth and future prospects. Strong retail sales data is, therefore, suitable for the economy as it implies stronger economic activity.
The data will usually capture both in-store and online sales, with reports breaking down into segments such as food and drink, clothing and autos. The sales figures are often adjusted to exclude volatile and bulky components such as autos (for the US) and fuel (for the UK) which can distort the underlying trends. As a trader, it’s often better to look at the adjusted numbers (i.e. Retail Sales minus automobile purchases).
An issue with retail sales data is that it can often be subject to significant revisions.
It is advisable to look also at year-on-year trends, as seasonality can have a massive part to play, such as the timing of heavy-spending holidays such as Easter (which can fall in either March or April).
There are two consumer surveys in the US that the market is mainly concerned with on a monthly basis. They incorporate both present conditions and expectation surveys:
- Conference Board’s Consumer Confidence
This is a mail survey conducted by the Conference Board (a private company) that measures how optimistic or pessimistic consumers are in the state of the US economy. The suggestion is that the more optimistic a consumer is, the more likely they are to spend money and purchase goods and services. Expectations question to cover the next six months.
- University of Michigan Sentiment
This is a telephone survey conducted by the University of Michigan which asks how confident people feel about the stability of their incomes, and how that affects their spending and borrowing decisions. It, therefore, serves as one of the key indicators for the overall shape of the economy.
There are two readings every month of Michigan Sentiment. A preliminary reading, released around the middle Friday of the month, gives an initial assessment of the current month and accounts for around 60% of the total survey.
A final reading is released on the final Friday of the month. Part of the Michigan Sentiment is the Michigan Current Conditions component and a Michigan Expectations component which can add further detail and analysis.
Both consumer surveys have been widely followed by the market for decades and can influence the US Federal Reserve.
In the early 2000s, Federal Reserve Chairman Alan Greenspan would often cite Consumer Confidence as a key determinant of near-term economic growth. As is often the case with data sets, you should look for trends in the data and look to confirm any one-month surprise readings in the next month’s data before using it as an indicator of changing consumer expectations.