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posted on 30 January 2015

Final January 2015 Michigan Consumer Sentiment Remains at Eleven Year High

by Doug Short, Advisor Perspectives/dshort.com

The final University of Michigan Consumer Sentiment for January came in at 98.1, virtually unchanged from the 98.2 preliminary reading and a strong surge from last month's 93.6. This is the highest final monthly sentiment in eleven years. Investing.com had forecast of 98.2 for the January Final.

See the chart below for a long-term perspective on this widely watched indicator. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.

Click to View

To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is now 15 percent above the average reading (arithmetic mean) and 17 percent above the geometric mean. The current index level is at the 88th percentile of the 446 monthly data points in this series.

The Michigan average since its inception is 85.1. During non-recessionary years the average is 87.4. The average during the five recessions is 69.3. So the latest sentiment number puts us 28.9 points above the average recession mindset and 10.8 points above the non-recession average.

Note that this indicator is somewhat volatile with a 3.1 point absolute average monthly change. The latest month was a larger 4.5 point change. For a visual sense of the volatility, here is a chart with the monthly data and a three-month moving average.

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 broad pattern and general trends have been remarkably similar to the Michigan Index.

Click to View

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).

Click to View

The general trend in the Michigan Sentiment Index since the Financial Crisis lows had been one of slow improvement. But it has now surged to a dramatic eleven-year high.

Caveats on the Use of University of Michigan Consumer Sentiment

This survey is quantitatively derived from a fairly complex questionnaire (sample here) via a monthly telephone survey. According to Bloomberg:

This release is frequently released early. It can come out as early as 9:55am EST. The official release time is 10:00. Base year 1966=100. A survey of consumer attitudes concerning both the present situation as well as expectations regarding economic conditions conducted by the University of Michigan. For the preliminary release approximately three hundred consumers are surveyed while five hundred are interviewed for the final figure. The level of consumer sentiment is related to the strength of consumer spending. Please note that this report is released twice per month. The first is a preliminary figure while the second is the final (revised) figure.

This is a survey, a quantification of opinion rather than facts and data. The question - does sentiment lead or truly correlate to any economic activity? Since 1990, there seems to be a loose general correlation to real household income growth.

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