The UBS consumption indicator rose from a sharply upwardly revised 1.67 in April to 1.73 in May, its strongest reading since December 2013. Note that the May results incorporate some significant modifications to the way in which the index is calculated, most notably via the inclusion of a measure of employment trends.
The mid-quarter gain means that the indicator has risen every month since falling to a low of 1.43 in January when the SNB pulled the plug on its minimum exchange rate target. Moreover, the latest outturn is some 0.05 points above its mark at the end of 2014, suggesting that consumers have fully adjusted to what was at the time, a major policy surprise.
The latest improvement was largely due to a 6 percent annual increase in new car registrations as well as marginally healthier sentiment in the retail sector (although most retailers remain quite negative). Current levels of the indicator should be consistent with yearly growth of real consumer spending around 1.7 percent over the coming quarter, little changed from the first quarter outturn.
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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