Friday, 26 August 2011

Michigan Consumer Sentiment: Up Slightly But the 4th Worst on Record

The University of Michigan Consumer Sentiment Index final report for August came in at 55.7, a slight improvement over the 54.9 preliminary reading August 12, but this is the 4th lowest monthly final since the inception on the series in 1798. The consensus expectation was for 55.8. The two lowest months (52.7 and 51.7) were at the depths of the 1980 recession, and the third lowest was in November 2008 during somes of the darkest days of the Financial Crisis.

See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I've added a linear regression to help understand the pattern of reversion to the trend. I've also highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.

To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is about 35% below the average reading (arithmetic mean), 34% below the geometric mean, and 36% below the regression line on the chart above. The current index level is at the 0.7 [!] percentile of the 404 monthly data points in this series.

The Michigan average over since its inception is 85.8. During non-recessionary years the average is 88.5. The average during the five recessions is 69.3.

For the sake of comparison here is a chart of the Conference Board's Consumer Confidence Index (monthly update here). The Conference Board Index is the more volatile of the two, but the general pattern and trend are remarkably similar to the Michigan Index.

And finally, the prevailing mood of the Michigan survey is also similar to the mood of small business owners, as captured by the NFIB Business Optimism Index (monthly update here).

Consumer and small business sentiment remains at levels associated with other recent recessions. The trend in sentiment since the Financial Crisis lows has been one of slow improvement. The August final numbers from the Michigan survey are constent with deep recessions.

by: Doug Short


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