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posted on 12 February 2016

Preliminary February 2016 Michigan Consumer Sentiment Continues Slow Decline

by Doug Short, Advisor Perspectives/

The University of Michigan Preliminary Consumer Sentiment for February came in at 90.7, a 1.3 point decrease from the 92.0 January Final reading. had forecast an even 92.0.

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

Consumer confidence continued its slow decline in early February, with its current level just below the average recorded during the 2nd half of 2015 (91.0). The small early February decline was due to a less favorable outlook for the economy during the year ahead, while longer term prospects for the national economy remained unchanged at favorable levels. While slowing economic growth was anticipated to slightly lessen the pace of job and wage gains, consumers viewed their personal financial situations somewhat more favorably due to the expectation that the inflation rate would remain low for a considerable period of time. Indeed, consumers anticipated the lowest long term inflation rate since this question was first asked in the late 1970's. No one would have guessed forty years ago, when high inflation was the chief cause of pessimism, that consumers would someday base their optimism on ultra-low inflation transforming meager wages into real income gains. The Fed's goal of pushing the inflation rate upward must be simultaneously accompanied by comparable gains in wages to prevent declines in real incomes and living standards. Overall, the data indicate that real consumption expenditures can be expected to advance by 2.7% in 2016.

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 6.3 percent above the average reading (arithmetic mean) and 7.6 percent above the geometric mean. The current index level is at the 57th percentile of the 458 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 21.4 points above the average recession mindset and 3.2 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 1.3 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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