Monday, February 17, 2014

Hockey risks scaring off consumers

You can never be sure what a fall in the measures of consumer confidence actually proves, but if I were Joe Hockey I'd be a bit worried. If he keeps on playing tough guy he may frighten people into clamping their purses shut.

We learnt last week that the Westpac-Melbourne Institute index of consumer sentiment fell by 3 per cent this month, down 9.5 per cent from its election-time high. Optimists now barely outnumber pessimists, the worst result since July.

I'm a great believer in the central role of business and consumer confidence - their alternating moods of optimism and pessimism - play in driving the ups and downs of the business cycle. As the Rudd government demonstrated with its remarkably deft response to the global financial crisis, managing psychology is probably more important that actual stimulus spending.

Trouble is, we don't seem able to measure consumer confidence with any accuracy. The index of consumer sentiment is an unreliable predictor of consumer spending. And there's reason to fear it tells us more about the state of politics than the state of the economy.

People who intend voting for the government of the day are invariably far more optimistic about the economy than people who intend voting for the opposition. This could mean people's views on how well the economy is being managed determine whether they intend to vote for government or opposition.

But Labor voters switched from pessimistic to optimistic and Coalition voters from optimistic to pessimistic the moment Kevin Rudd won the 2007 election, then the positions were reversed when Tony Abbott won in September. Seems clear it's people's political loyalties that drive their views about the state of the economy.

Even so, the fall in confidence since the election does seem to be explained by people's growing worries about losing their jobs. The related Westpac-Melbourne Institute unemployment expectations index worsened by 2.3 per cent this month, and by 9.2 per cent since September.

In a rational world people would judge their risk of unemployment from the monthly labour force figures, which, although they show unemployment worsening marginally to 6 per cent last month, aren't so frightening.

In the real world, however, the punters judge their risk of joblessness from the frequency of stories about factory layoffs on the TV news. All the fuss about the successive decisions of Ford, Holden and now Toyota to cease car-making in Australia, plus bad news about other manufacturers, Telstra and Qantas seems to have put the wind up a lot of people.

An Essential opinion poll shows respondents nominating unemployment as their greatest economic concern. Add all Hockey's efforts to soften us up for a tough budget and it's hardly surprising pessimism is spreading.

Note that, as part of this non-rational response, news that factories will close in three years' time is coded as jobs lost this week. Job losses in manufacturing get three times the publicity of jobs lost elsewhere, and jobs losses in the public sector worry no one in the private sector.

The Reserve Bank believes rising house prices are a helpful development, spurring people to get on with their housing plans before prices rise further, and also making home owners feel wealthier and so willing to lower their rate of saving and increase their rate of consumption spending.

This ''wealth effect'' would boost consumption even though incomes won't be rising strongly because growth in employment and wages will be weak.

But the proportion of consumer sentiment respondents believing it's a good time to buy a dwelling has fallen 10.8 per cent from its September peak. And Saul Eslake, of Bank of America Merrill Lynch, differs with the Reserve by believing house price rises are unhelpful.

He points out that renters are significantly less optimistic than mortgagers and outright home owners according to the consumer sentiment index, with tenants' confidence falling harder over the past year.

While it was true in the pre-GFC world that households responded to their rising (paper) wealth by slashing their rate of saving, Eslake doubts it will happen this time, mainly because household debt remains very high as a proportion of disposable income.

In the end, you can ''monetise'' rising paper wealth only by borrowing against it. And people with a lot of debt who are starting to worry about whether they'll keep their jobs are much less likely to resume borrowing.

This is something Hockey should remember when the econocrats tell him retail sales are growing more strongly since the election and that stronger home building approvals presage a rise in dwelling construction.

If Hockey's budget toughness - rhetorical and otherwise - adds to the punters' anxieties, his big political vindication could delay the return to strong employment growth.