CH: UBS Consumption Index

Wed Jan 28 01:00:00 CST 2015

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Level 1.42 1.29

The UBS consumption indicator ended 2014 on a strong note. Having lost a cumulative 0.11 points in October/November the measure jumped 0.13 points in December to 1.42, its strongest reading since July.

The bounce came largely out of a 20 percent monthly spurt in new car registrations which recorded their highest December mark since the data were first compiled (1995) and the sixth strongest ever reading on record. However, the surge here is most likely misleading as higher carbon taxes on new purchases came into effect from the start of 2015. Accordingly, it is highly likely that at least some of December's buying came at the expense of January. Indeed, consumer sentiment fell 9 points over the month to minus 6.

The December results are in keeping with annual growth of real household spending of around 1.3 percent. That said, the survey was undertaken before the SNB's shock decision to abandon its target exchange rate floor earlier this month and at this stage the impact of this upon consumers is unclear.

The UBS consumption indicator tracks changes in real consumer spending and can be used as a gauge of the strength of domestic demand. A rising indicator value reflects rising consumer spending, which generally leads to economic growth and potentially augur inflationary pressures to come.

Consumer spending accounts for a large portion of the economy, so if you know what consumers are up to, you will have a pretty good idea on where the economy is headed. Needless to say, that is a big advantage for investors. The UBS consumption indicator is calculated using five specific indicators of spending and expressed in the form of an index. These indicators are: new car sales, business trends in retail, overnight hotel stays by Swiss nationals in Switzerland, the consumer sentiment index and credit card transactions. Because the index value is always positive, markets compare the current index value to the short and long-term average values in order to gauge Swiss economic health. In the long term the average has been approximately 1.5, but may change with time. The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.