Understanding Consumption from Six Perspectives

Summary

First, in the previous report "From Elastic Space to Necessary Conditions," we discussed a logic related to consumption. Both the stock markets in 2021 and 2024 marked the beginning of a technology narrative, but the 2024 narrative was constrained by corporate earnings, while the 2021 narrative could continue due to significant expansion in the overall economy. Therefore, after the systematic rise in risk appetite is completed, attention should be paid to three clues: consumption, the construction chain, and the supply side, which are the "necessary conditions" for overall improvement. If these conditions cannot be met, the sustainability of the pricing narrative in the first quarter will be affected, similar to 2024; if they can be achieved, it will correspond to structural opportunities in related assets.

Second, the above logic is essentially from the perspective of "odds." From the perspective of "winning probability," how should we view consumption? Will consumption gradually improve in 2025, and at what slope will it improve? This article aims to briefly discuss views from several angles.

Angle One: Consumption is a key intermediate variable in the policy framework since "924." The press conference held by the State Council Information Office on March 5 highlighted an important logic: this round of policy adjustment has significant innovations, breaking the convention that "consumption is a slow variable." We understand that consumption, investment, and exports are the three sources of terminal demand, and the conventional counter-cyclical policy lever is generally investment, which drives the overall economy through government or corporate sectors, ultimately affecting household consumption; direct policies for consumption are generally aimed at stabilization. However, this round of growth stabilization aims to start from the household sector, using "investment in people" to drive the overall economy, making consumption the "offensive" lever for policy stabilization.

Angle Two: Broad employment pressure may be one of the important reasons for the slowdown in consumption over the past three years, and the current employment cycle may have bottomed out. "Employment - Income - Consumption" is a correlated process. From the BCI employment leading index, it has been fluctuating downward since 2021, bottoming out in September last year; from the PMI of the construction, service, and manufacturing industries, their employment lows also consistently occurred in August or September last year, and have shown preliminary recovery, but the trend still needs to be consolidated. Looking ahead, with the improvement in nominal GDP and a broad-based rise in growth, employment recovery should have a certain degree of endogeneity.

Angle Three: The most significant phase of the real estate cycle's drag on consumption has passed. Over the past three years, the real estate cycle has constrained consumption under two logics: first, the continuous reduction of LPR rates has led to an inversion of existing and new mortgage rates, causing residents to concentrate on early repayments, affecting current consumption capacity; second, falling housing prices have led to a contraction in residents' balance sheets, affecting consumption willingness. The policy of lowering existing mortgage rates after "924" has resolved the first issue, and after the "re-pricing day" for existing mortgage rates on January 1, 2025, it should have been completed. In terms of housing prices, since October last year, the month-on-month decline in the new housing price index for 70 cities has gradually narrowed, and the new housing price index in first-tier cities has preliminarily exited month-on-month negative growth since November last year, indicating that residents' household balance sheets are stabilizing Perspective Four: The prices of consumer goods and residents' consumption are expected to enter a "positive cycle" phase. According to the BCI "Consumer Goods Price Leading Index," it has been declining since early 2021, experiencing the impacts of constraints on residents' living radius, real estate adjustments, and early mortgage repayments by urban households in three stages, bottoming out in October 2024, with the bottom position roughly comparable to each historical cycle. If this indicator represents expectations for consumer goods prices, then there is hope for a positive cyclical relationship between price expectations and the physical volume of consumption.

Perspective Five: There is imaginative space for proactive population policies, and changes in population expectations will affect related consumption in areas such as maternal and infant care, education, automobiles, and housing. Following the October 2024 measures titled "Several Measures to Accelerate the Improvement of the Fertility Support Policy System and Promote the Construction of a Fertility-Friendly Society," local population policies have entered a new round of warming. The rebound in newborn population in Tianmen City, Hubei Province, under proactive encouragement of childbirth policies in 2024 has attracted market attention. In March 2025, Hohhot City introduced a subsidy policy for childbirth.

Perspective Six: There are potential policy dividends in "improving the normal growth mechanism of workers' wages." From the perspective of the "Permanent Income Hypothesis" (PIH) in consumption, the expectation of continuous income growth should enhance consumption propensity more than one-time subsidies. Under the clear tone of the Central Economic Work Conference to "enhance consumption capacity, willingness, and levels," and the government work report to "improve the normal growth mechanism of workers' wages," subsequent policy advancements are worth paying attention to.

Main Text

In the previous report "From Elastic Space to Necessary Conditions," we discussed a logic related to consumption. Both the 2021 and 2024 stock markets marked the beginning of a technology narrative, but 2024 was disrupted by corporate profit constraints, while 2021 was able to continue due to significant expansion in the overall economy. Therefore, after the systematic rise in risk appetite is completed, attention should be paid to three clues: consumption, the construction chain, and the supply side, which are "necessary conditions" for overall improvement. If these cannot be achieved, then referring to 2024, the sustainability of the pricing narrative in the first quarter will be affected; if they can be achieved, it will correspond to structural opportunities in related assets. This logic is essentially from the perspective of "odds." From the perspective of "winning probability," how should we view consumption? Will consumption gradually improve in 2025, and at what slope will it improve? This article aims to briefly discuss views from several angles.

In the early March report "From Elastic Space to Necessary Conditions," we pointed out that the capital market at the beginning of 2024 focused on the narrative of "computing power," but as the overall pressure gradually increased in the second and third quarters, corporate profits became a constraint. Another case is 2021; why could that round of "low-carbon economy" accompany a continuous rise in the stock market? An important background is the expansion of the overall economy during the same period. For 2025, the Central Economic Work Conference pointed out that "efforts should be made to achieve a stable combination of growth, stable employment, and a reasonable recovery in prices," which targets the nominal growth rate. How will this process be achieved? Logically, three conditions need to be met: first, consumption needs to be effectively repaired Second, the construction industry cannot become a drag. Third, prices need to rise reasonably. The above three conditions are necessary for achieving the predetermined goals of overall growth. While pursuing flexible space and promoting the full pricing of technology innovation assets, attention should be paid to clues from consumption, infrastructure real estate, and the supply side. If the latter cannot be realized, it will impact the sustainability of short-term pricing for the former; if the latter can be achieved, they will also correspond to structural opportunities for assets.

Perspective One: Consumption is a key intermediate variable in the policy framework since "924." The press conference held by the State Council on March 5 highlighted an important logic, which is that this round of policy regulation has significant innovations, breaking the convention that "consumption is a slow variable." We understand that consumption, investment, and exports are the three sources of terminal demand. The conventional counter-cyclical policy lever is generally investment, which drives the total amount through government or enterprise sectors, ultimately affecting household consumption; direct policies for consumption are generally aimed at stabilization. However, this round of steady growth is designed to start from the household sector, using "investment in people" to drive the total amount, making consumption effectively the "offensive" lever for policy stabilization.

On March 5, the State Council's press conference interpreted the government work report, pointing out: If everyone continues to pay attention to the report or reads it carefully, they can see that this report fully reflects the innovation in macro-regulation thinking since the Central Political Bureau meeting on September 26. For example, the report explicitly states the need to strengthen the people-oriented direction of macro policies. If we look closely, there are also some new proposals. For instance, it breaks the convention that "consumption is a slow variable," placing a greater emphasis on boosting consumption and emphasizing the interaction between promoting consumption and expanding investment. Additionally, it highlights the importance of asset prices in macro-regulation, incorporating the stabilization of the real estate and stock markets into overall requirements, which familiar macroeconomic journalists may note is a first. Furthermore, it emphasizes investing more policy resources in people and serving people's livelihoods, all of which are innovations in macro policy aimed at forming a virtuous cycle between economic development and improvement in people's livelihoods, better promoting high-quality development in stabilizing growth and employment.

Perspective Two: Broad employment pressure may be one of the important reasons for the slowdown in consumption over the past three years, and this employment cycle may have already bottomed out. "Employment - Income - Consumption" is a related process. From the BCI Employment Leading Index, it has shown a downward trend since 2021, bottoming out in September last year; from the construction, service, and manufacturing PMIs, their employment lows also consistently occurred in August or September last year, and have now initially rebounded, but the trend still needs to be consolidated. Looking ahead, under the backdrop of nominal GDP improvement and broad-based growth, employment recovery should have a certain degree of endogeneity.

In the report "Reshaping Broad-based Growth" at the end of 2024, we pointed out: We use the "BCI Enterprise Recruitment Leading Index" as an observation indicator, and we can see that it has been synchronized with the growth rate of nominal GDP. This means that in the context of insufficient nominal GDP growth, employment opportunities have decreased, which will further transmit to household income and consumption In the report "Current Corporate Conditions from February BCI Data," we pointed out that the BCI corporate hiring outlook index reached a recent high in May 2021, with March 2023 being the second-highest point, followed by two phases of decline. The bottom of this indicator in the current round is expected to be in September 2024.

In the previous report "A Few Impressions on February PMI Data," we noted that employment is improving, but the trend still needs to be consolidated (see chart). Looking at employment across the three major sectors, the low point for manufacturing employment was in August last year; the low point for construction employment was in September last year; and the low point for service sector employment was also in September last year. If we take a simple arithmetic average, September last year was the low point for overall employment absorption capacity, which has gradually improved since then, reaching a peak in January this year, with a slight pullback in February due to the Spring Festival, but still higher than before January. This indicates that with the gradual transmission of counter-cyclical policies, employment has shown initial improvement. However, in absolute terms, it is still below the levels of 2021 and earlier, and the recovery trend still needs to be consolidated.

Perspective Three: The most significant phase of the real estate cycle's drag on consumption has passed. Over the past three years, the real estate cycle has constrained consumption under two logical frameworks: first, the continuous reduction of LPR rates has led to an inversion of existing and new mortgage rates, prompting residents to concentrate on early repayments, affecting current consumption capacity; second, falling housing prices have led to a contraction in residents' balance sheets, impacting consumption willingness. The adjustment policy for existing mortgage rates after "924" has resolved the first issue, and the "re-pricing day" for existing mortgage rates on January 1, 2025, should have been completed by then. In terms of housing prices, since October last year, the month-on-month decline in the new housing price index for 70 cities has gradually narrowed, while the new housing price index in first-tier cities has preliminarily exited negative month-on-month growth since November last year, indicating that residents' household balance sheets are stabilizing.

The adjustment of existing mortgage rates is one of the policy dividends since "924." On September 29, 2024, the People's Bank of China issued a notice clarifying matters related to the improvement of the pricing mechanism for commercial personal housing loans. According to the arrangement, when the existing mortgage rates deviate from the national new mortgage rates by a certain margin, borrowers can negotiate with banks to dynamically adjust existing mortgage rates and agree on the re-pricing cycle On October 31, multiple banks issued announcements to further refine arrangements. Theoretically, if there were no adjustments in the fourth quarter of last year, January 1 of this year will also enter the repricing date.

Housing prices are showing a gradual stabilization trend. Observing the new residential price index of 70 cities, the year-on-year change for September 2024 was -0.7%, narrowing to -0.5% in October, further narrowing to -0.2% in November, and both December and January 2025 were -0.1%. The new residential price index in first-tier cities for September 2024 was -0.5%, narrowing to -0.2% in October, and for November to January 2025, it was 0, 0.2%, and 0.1% respectively.

Perspective Four: The prices of consumer goods and residents' consumption are expected to enter a "positive cycle" phase. From the BCI "Consumer Goods Price Leading Index," it has been declining since early 2021, experiencing the impacts of three stages: constraints on residents' living radius, real estate adjustments, and early mortgage repayments by urban households. It bottomed out in October 2024, with the bottom position being roughly equivalent to each historical cycle. If this indicator represents expectations for consumer goods prices, then there is hope for a positive cyclical relationship between price expectations and the physical volume of consumption.

In the annual report "Reshaping Broad-Based Growth," we pointed out that based on the adjustment of consumer goods volume and price since early 2021, one of the driving factors is the constraint of residents' living radius (2021-2022); the second is the total contraction caused by real estate adjustments (2022-2024); and the third is the crowding out of current consumption by early mortgage repayments from urban households (2023-2024). By the end of 2024, all three clues may have reached their concluding stages.

From the BCI Consumer Goods Price Leading Index, the previous low points were 37.8 in December 2012, 39.7 in August 2015, 37.6 in February 2020, and 37.1 in October 2022, with the current low point being 37.0 in October 2024.

Perspective Five: There is imaginative space for proactive population policies, and changes in population expectations will impact related consumption in areas such as maternal and infant care, education, automobiles, and housing. After the October 2024 "Several Measures to Accelerate the Improvement of the Fertility Support Policy System and Promote the Construction of a Fertility-Friendly Society," local population policies have entered a new round of warming. The rebound in newborn population in Tianmen City, Hubei Province, under proactive encouragement of childbirth policies in 2024 has attracted market attention. In March 2025, Hohhot City introduced a subsidy policy for childbirth. **

In 2024, the number of newborns in Tianmen City, Hubei Province reached 7,217, a year-on-year increase of 17%, far exceeding the national year-on-year growth rate of 5.8%. Among the 7,217 newborns, 3,653 are second or third children, accounting for over 50%. The increase in the birth rate is backed by a series of positive pro-natal policies.

Recently, Hohhot City officially issued the "Implementation Opinions on Promoting Population Aggregation and High-Quality Population Development," proposing a one-time childcare subsidy of 10,000 yuan for families giving birth to their first child and settling in Hohhot, a subsidy of 50,000 yuan (distributed over five years) for families giving birth to their second child and settling in Hohhot, and a subsidy of 100,000 yuan (distributed over ten years) for families giving birth to their third child or more and settling in Hohhot.

Perspective Six: "Improving the Normal Growth Mechanism of Workers' Wages" has potential policy dividends. From the perspective of the "Permanent Income Hypothesis" (PIH) in consumption, the expectation of continuous income growth should enhance consumption propensity more than one-time subsidies. Under the clear tone of the Central Economic Work Conference to "enhance consumption capacity, willingness, and level," and the government work report to "improve the normal growth mechanism of workers' wages," subsequent policy advancements are worth paying attention to.

The Central Economic Work Conference pointed out, "Implement special actions to boost consumption, promote income growth and reduce burdens for the middle and low-income groups, and enhance consumption capacity, willingness, and level."

The government work report stated, "Implement special actions to boost consumption. Formulate special measures to enhance consumption capacity, increase quality supply, and improve the consumption environment, releasing diversified and differentiated consumption potential, and promoting the quality upgrade of consumption. Promote income growth for residents through multiple channels, reduce burdens for the middle and low-income groups, and improve the normal growth mechanism of workers' wages."

Original author: Guo Lei, source: Guo Lei Macro Tea Room, original title: "【Guotai Junan Macro Guo Lei】Understanding Consumption from Six Perspectives"

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