The only Australian economic indicator you need

The only Australian economic indicator you need
  • The secret to reading the Aussie economy…
  • We are a nation of shoppers
  • The four stages of reining in spending
  • Trading down effect

What if I told you the key to predicting an Aussie recession was simple?

That every economic model used to estimate Australia’s economic health was useless?

There’s no need for complicated mathematical formulas…or lines on a chart to tell the story.

And you don’t even need access to economic data from the Australian Bureau of Statistics.

It’s much, much simpler than that…

We are a nation of shoppers

Australia is a nation of consumers.

We aren’t a nation of builders or exporters or famers.

Don’t let those overhyped sectors of the market fool you.

Combined, mining and agricultural exports account for 11% of total gross domestic product (GDP).

And the building of residential property contributed almost 6% to Australia’s nation income.

Meanwhile, consumption — the buying and selling of goods and services — adds a whopping 57% to Australia’s GDP.

You can trawl through the economic data all you want, but the real clues to Australia’s economic health come down to how much money we are spending.

The real clues to understanding the health of the Aussie economy lie in what’s known in the rag trade as the ‘kiddie index’.

The four stages of reining in spending

Now, I didn’t create the kiddie index. I wish I could take the credit though.

The phrase was coined by former David Jones CEO Mark McInnes over a decade ago.

The premise is simple.

It assumes the main spender of the house is female.

When the household budget starts to get tight, women tend to stop spending money on their husbands. 

As the purse strings tighten, she drops off spending on the house.

Next up is the spending on herself. The new frock for a wedding? No longer needed. Then the smaller luxuries drop, like cosmetics and perfumes. 

However, come hell or high water, women rarely stop spending money on their kids.

Unless, of course, the household budget really is up the creek without a paddle.

Trading down effect

All of this brings me to Kmart.

The market darling of Australia’s discount retailing.

The company that somehow made cheap trendy.

However, all might not be well over there.

Recent financial results suggest that the November and December retail period was ‘slower’ than normal, with womenswear slowing the most.

This is a double whammy for the Australian economy.

First of all, there is the reduction in women’s apparel. This indicates the main shoppers of the house are already reducing spending.

However, compounding the kiddie index is something called the trading down effect.

When people feel wealthier, they shop at Myer instead of Target. In the good times, they move on from Myer to David Jones.

If people feel like they have more cash to splash, they are more likely to shop at luxury department stores.

The flip side of that is the trading down effect.

When people feel broke, they shun David Jones and Myer for Target.

At the bottom of the discount retail model are stores like Big W and Kmart.

These two low-cost retailers are meant to weather any retail downturns.

However, a reduction in spending in a cheap-as-chips retailer is an ominous warning sign.

Aussies aren’t spending money — period.

But consumer spending is crucial to keep the Aussie economy out of a technical recession.

However, if categories like womenswear are seeing a decline in spending at stores like Kmart, it suggests that people are already feeling the pinch.

This year, pay close attention to Kmart’s financial results (owned by Wesfarmers Limited [ASX:WES]). The discount retailer is a simple indictor as to where we are in the economic cycle.

But if you see results that show spending on kids’ toys or clothing has dropped, head for the hills. We have some serious economic turbulence coming our way.

Because when spending on the kids drops, Australia will be facing its first recession in 27 years.

Until next time,

Shae Russell,
Editor, The Daily Reckoning Australia