The recovery in the UBS consumption indicator ran out of steam in April. Following a cumulative rise of 0.23 points over February/March, the index shed 0.09 points to 1.25, still its second highest reading for the year so far but also some 0.22 points below its level at the end of 2014.
The main downward pressure stemmed from a struggling auto industry where new car registrations fell some 5 percent on the month. Overall retail sentiment was steady at a lowly minus 13 which suggests that the sector may be in for a prolonged period of soft demand.
Household consumption rose 0.3 percent in the fourth quarter, only half of its third quarter rate but even this should look strong by comparison with its performance last quarter. The January-March national accounts are due for release on Friday and look likely to show a contraction in total output, prompted in no small way by the weakness of consumer demand. Today's UBS report warns that the current quarter may not be any better.
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.
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