Reserve Bank mandarins love a good liaison, but I fear they’re doing it with the wrong sort of people.

Liaising, especially “business liaison”, is supposed to be the bank’s way of staying in touch with what is happening in the real world – as opposed to the RBA’s main source of information: Statistics indicating what might have happened in the past.

Given that monetary policy already operates with a lag – it can be a year between the governor wielding his blunt instrument and the victim falling over – swinging the cudgel based on months-old information adds extra danger.

Which is why the RBA needs to use the Window Cleaners Index instead of inviting executive types in for a quick liaison and a cup of tea.

The WCI™ (and patent pending) is a leading indicator of the economy turning cactus. Based on an exhaustive sample of one friend’s anecdote, it is rapidly proving to have brilliant predictive power.

How it works

Normally when his windows stop letting in daylight, the friend said he would ring his regular window cleaner and book in for a service, usually taking a place at the end of the queue in a couple of weeks.

This time, the cleaner said he could come in two days. Previously, he would turn up with an offsider to share the squeegee duties. This time, he was wiping solo – he had to let the offsider go.

It strikes me that residential window cleaning could be the perfect barometer for discretionary consumer spending.

When money is tight or there’s fear about that money will get tight amid recession talk, having your windows cleaned is hardly essential.

They can be let go a bit longer, or a lot longer. For those able to hold a hose, maybe a bit of spraying will do in the present climate.

What’s more, a rapid rise in dirty windows indicates tightness spreading beyond the obvious targets for whom tightness was already a given – renters and those with big recent mortgages.

This is part of the “lag” in monetary policy in action. First higher interest rates come for the heavily borrowed, then their impact spreads more broadly.

Home sales barometer

It’s not as timely or novel as the WCI™, but another indicator of pain in the mortgage market has been released on Tuesday – CoreLogic’s latest Pain and Gain report showing what percentage of home sales have been at a nominal loss or profit.

More interestingly in the detail, it shows a steady rise in the percentage of resales within the first two years of purchase.

In the December quarter of 2021, 5.8 per cent of homes sold had been held for less than two years. In the March quarter last year, it was 6.6 per cent.

In the December quarter 2022, the figure was 7.9 per cent and the 2023 March quarter landed with a hefty 8.4 per cent.

That suggests the RBA’s blows are indeed hurting the people with the most recent mortgages – and therefore with the least safety margin built up.

And the painful nature of many sales comes through in the percentage of those briefly-held homes selling at a loss.

In the December 2021 quarter, it was just 3 per cent and 3.4 per cent in the March 2022 quarter.

For December 2022, it was 10 per cent and a sharp 12.4 per cent in the latest quarter. Ouch.

That suggests higher rates and the threat of the looming fixed-rate cliff are forcing people to sell. The pain spreads.

Total sales volume remains low, limiting the effect of forced sales on overall prices, but that’s no comfort for those who are in the red on what is most people’s biggest investment.

As previously written in this space, interest rates aren’t the RBA’s real blunt instrument – they are only the handle for the unemployment ratchet. Squeezing borrowers into forced sales and losses is part of the transmission mechanism.

Next phase of slowing

Window cleaners flagging consumers slamming shut their wallets and purses is part of the next phase of the economy slowing beyond the mortgage belt. In turn, window cleaners with little work will not be spending.

And the WCI™ is a window, so to speak, into the service sector, the bit that the RBA claims to be particularly concerned about.

What’s more, the WCI™ theory is working in practice.

The ABS retail sales statistics the RBA had for its meeting earlier this month were bad enough but were for the month of April – already old.

More current, the big banks can sum up what their customers are doing with their debit and credit cards in one word: Less.

Discretionary spending is contracting and even spending on essentials is heading south.

Sparkie intuition

Another anecdote: Ran into a local sparkie, asked how he was going – he said he wasn’t busy at all. Said the wholesaler he goes to is empty.

The bloke isn’t young. He’s wondering if he may as well retire.

The WCI™, my sparkie, increasing short-term home resales and the bank card data are saying June sales figures (when they’re released at the end of July, in time for the RBA’s August meeting) will make April’s look good.

Little wonder the chief economists of the NAB and AMP now reckon a recession here is a 50/50 bet.

That would certainly achieve the RBA’s aim of boosting the unemployment rate to 4.5 per cent and do it sooner than the bank is forecasting, for whatever such forecasts are worth.

Meanwhile, the latest RBA bulletin contains a scholarly feature examining how much of our inflationary problem comes from supply problems, rather than from demand being pushed by cashed-up consumers enjoying wage rises.

In Estimating the Relative Contributions of Supply and Demand Drivers to Inflation in Australia, the authors used three different methodologies to untangle supply versus demand. Each of the three found supply was causing most of the inflation.

Governor Phil Lowe admitted in November that interest rates don’t work as well when inflation is supply-driven – but the bank keeps turning the ratchet anyway.

Maybe the board should consult the WCI™ before the next meeting.

Oh, the things that I have seen when I’m cleaning windows.