CH: UBS Consumption Index

July 27, 2016 01:00 CDT

Actual Previous Revised
Level 1.34 1.35 1.24

The UBS consumption indicator rose 0.10 points in June, but only from a significantly weaker revised May base. In fact, at 1.34, the end of quarter reading was slightly short of May's originally reported outturn. That said, June's advance was the third in as many months and the strongest level since June 2015.

June's improvement reflected a 1.3 percent yearly increase in the number of overnight hotel stays, mainly by Swiss nationals who accounted for 60 percent of the rise. There was also a modest pick-up in optimism in the retail sector.

The correlation between the UBS measure and actual household spending is not especially high and the former significantly underestimated a (surprisingly robust) 2.8 percent annualised bounce in consumption in the first quarter.

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.