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How weak is consumer spending?

• This week we delve into the latest national accounts figures on consumer spending to try to assess just how weak consumer spending is.
• The national accounts measure of private consumption (50% of GDP) has a much broader coverage of consumer spending than the monthly retail sales data (17% of GDP). Private consumption in the national accounts also has much broader coverage of services spending than the retail sales release, which is heavily skewed towards goods spending.
• We conclude that it’s a very difficult question to answer given the presence of pulled-forward demand in some categories of spending (eg Household Goods & Technology, home gym equipment), and the presence of pent-up demand in others, most obviously in international travel.
• A few observations we can make are: i) the pace of growth in volumes of consumer spending has slowed in recent times, but for the most part remain at very high levels and above the levels pre-pandemic trends would suggest; ii) it’s a very mixed bag, with little consistency across the items of spending that usually slow when consumers are under pressure (eg holiday travel, cars, meals out all remain very elevated), while household goods and technology, alcohol and recreation and culture have all declined somewhat; iii) the sectors that are performing best are either essential spending and/or those that have pent-up demand from the pandemic. Underperforming sectors include interest sensitive sectors, those sectors that performed strongly during the pandemic, where pulled-forward demand may have been a factor.
• Anecdotes from CEOs confirm changed consumer behaviour, suggesting the current level of interest rates and high inflation is pressuring some consumers. Businesses are reporting reduced forward orders in the retail sector. Importantly, the ongoing strength in the labour market is preventing a more significant slowing in consumer spending, though leading indicators suggest a moderate rise in unemployment going forward (but not tomorrow when we expect employment to bounce back strongly). And retail and wholesale price trends still suggest the RBA might get uncomfortable news on CPI in the August and September monthly CPIs and the Q3 CPI.

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