posted on 27 February 2015
by Doug Short, Advisor Perspectives/dshort.com
The University of Michigan Consumer Sentiment for February came in at 95.4, up from its 93.6 February preliminary reading but down 2.7 points from the final reading of 98.1 in January, which was an eleven-year high. Investing.com had forecast 94.0 for the Michigan 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.
To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is now 12 percent above the average reading (arithmetic mean) and 13 percent above the geometric mean. The current index level is at the 80th percentile of the 447 monthly data points in this series.
The Michigan average since its inception is 85.2. 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 26.1 points above the average recession mindset and 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 data point was a 2.7 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.
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).
The general trend in the Michigan Sentiment Index since the Financial Crisis lows had been one of slow improvement. But it is now a bit off its dramatic eleven-year high set last month.
Caveats on the Use of University of Michigan Consumer Sentiment
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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