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posted on 29 January 2016

Final January 2016 Michigan Consumer Sentiment Fractionally Below December

by Doug Short, Advisor Perspectives/dshort.com

The University of Michigan Final Consumer Sentiment for January came in at 92.0, a 1.3 point decrease from the 93.3 January Preliminary reading and a 0.6 point decrease from the December Final Reading. Investing.com had forecast an even 93.0.

Surveys of Consumers chief economist, Richard Curtin makes the following comments:

Consumer confidence has remained largely unchanged, as the January reading was just 0.6% below last month's level. The small downward revisions were due to stock market declines that were reflected in the erosion of household wealth, as well as weakened prospects for the national economy. The interviews conducted from last Friday until early this week provide no evidence that the East Coast blizzard influenced the data. To be sure, the overall level of confidence is below last January's peak, but thus far, the decline amounts to just 6.2%, indicating slower growth, not a recession in 2016. Consumers anticipate that the growth slowdown will be accompanied by smaller wage gains and slight increases in unemployment by the end of 2016. Importantly, favorable financial prospects have become dependent on very low inflation. The Fed's success at pushing the inflation rate higher may well exceed wage gains, thus erasing a critical strength in consumers' financial expectations. Consumers will actively demonstrate their resistance by moderating their purchases in the face of price hikes, thus acting to offset the Fed's rationale for higher rates.

See the chart below for a long-term perspective on this widely watched indicator. Recessions and real GDP are included to help us evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.

Michigan Consumer Sentiment

To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is 7.8 percent above the average reading (arithmetic mean) and 9.1 percent above the geometric mean. The current index level is at the 65th percentile of the 457 monthly data points in this series.

The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.5. The average during the five recessions is 69.3. So the latest sentiment number puts us 22.7 points above the average recession mindset and 4.5 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 0.6 point change from the previous month. For a visual sense of the volatility, here is a chart with the monthly data and a three-month moving average.

3-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.

Consumer Confidence

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).

NFIB Optimism

The general trend in the Michigan Sentiment Index since the Financial Crisis lows has been one of slow improvement. But the survey findings since December have been relatively range bound with January 2015 remaining the interim peak.

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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