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Consumer confidence drops for December

The Westpac Melbourne Institute of consumer sentiment index fell from 110.3 points in November to 105 in December, with thoughts on the economic outlook and uncertainty around employment dragging the index down. The fall in sentiment indicates the post-election glow around the successful nomination of the LNP (or perhaps it was more the removal of Labour?) has vanished, returning the index to its pre-September levels.

Greater consumer confidence indicates stronger optimism that people can pay their debts, continue to find work, buy a house and so on. More confident consumers are generally more willing to consume; spending on the credit card, taking out car loans and mortgages more frequently. Discretionary spending also often rises. These outcomes are all good for a nation like Australia chasing economic growth, as a majority of the economy is driven by consumer spending across a variety of sectors.

Higher consumer confidence is also good news for Australia’s retailers like Harvey Norman  (ASX: HVN), JB-HiFi (ASX: JBH) and Myer (ASX: MYR), whose products are largely purchased through discretionary income or credit card spending. It’s no coincidence that times for these retailers have improved this year, while consumer confidence figures are also up compared to calendar year 2013.

To put the index’s December change in context, the highest consumer sentiment ever reached was 127.67 in January 2005. Slightly lower scores in the mid-120s were also registered pre-GFC in 2008 and interestingly in 2010 (presumably as fiscal stimulus actions filtered through to consumers). The lowest point ever reached was 64.61 in November 1990.

Scores over 100 indicate that optimists outweigh pessimists, and the index has remained above 100 all this year (significantly higher than last year) apart from one small blip in June.

Foolish takeaway

The Consumer Sentiment index remains buoyant and reflects increased optimism around the economy this year compared to last, an outlook which should filter through to companies that rely on consumer discretionary income.  It is uncertain where the sentiment index will go over the next year or two as the Abbott government begins to enact more of its policies. If the carbon tax was as widely hated as big business and the media would have us believe, a successful abolition of the carbon tax should improve sentiment even if it has no other effects. With any luck, sentiment should remain positive, which will help to encourage the growth in non-mining sectors of the economy. However if the LNP begins to slash and burn spending in order to rein in a rising national debt, consumer sentiment is likely to fizzle out with it. Expect the earnings of companies like Myer, Harvey Norman, JB Hi-Fi, David Jones (ASX: DJS) and the newly launched Dick Smith Holdings (ASX: DSH) to fizzle out also.

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Motley Fool contributor Sean O’Neill doesn’t own shares in any company listed in this article.

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