CH: UBS Consumption Index

Wed Feb 25 01:00:00 CST 2015

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Level 1.24 1.42

Following its jump in December the UBS consumption indicator fell fully 0.18 points to 1.24 at the start of the year. December's spike had been attributable to a surge in new car registrations prompted by the then impending hike in carbon emissions taxes. Accordingly some reversal last month was always to be expected.

As it is, January's drop more than reversed the year-end gain and left the indicator at its lowest level since March 2013. Moreover, most probably the fall would have been sharper still had the majority of respondents not replied before the SNB's abandonment of its exchange rate target floor on 15th January. This was certainly the case in the SECO consumer climate survey (whose results feed into the UBS calculation) where consumer confidence just before the change in FX policy was significantly higher than afterwards.

As a result, while today's results should be consistent with annual growth of real household spending of around 1.3 percent the likelihood is that actual consumption was a good deal weaker.

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.