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posted on 18 March 2016

Preliminary March 2016 Michigan Consumer Sentiment Worst Than Forecast

by Doug Short, Advisor Perspectives/

The University of Michigan Preliminary Consumer Sentiment for March came in at 90.0, a 1.7 point decrease from the 91.7 February Final reading. had forecast 92.2.

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

Consumer confidence eased in early March due to increased concerns about prospects for the economy as well as the expectation that gas prices would inch upward during the year ahead. All of the decline during the past year has been in the Expectations Index, which was due to a weakening outlook for the pace of growth in the national economy. While consumers do not anticipate a recession, they no longer expect the economy to outperform the 2.4% rate of economic growth recorded in the past two years. In contrast, personal financial expectations remained strong in early March, comparable to the favorable levels recorded nearly a decade ago. Overall, it would appear that consumers have accommodated slower economic growth as well as rising gas prices without an accompanying rise in uncertainty about their own personal financial situation. The most important element supporting consumers' optimism is their conviction that the slower pace of economic growth will not have an appreciable impact on maintaining the jobless rate at about its current low level. The data are still consistent with a 2.7% rate of growth in personal consumption expenditures during 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 5.4 percent above the average reading (arithmetic mean) and 6.7 percent above the geometric mean. The current index level is at the 54th percentile of the 459 monthly data points in this series.

The Michigan average since its inception is 85.4. 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 20.7 points above the average recession mindset and 2.5 points above the non-recession average.

Note that this indicator is somewhat volatile, with a 3.0 point absolute average monthly change. The latest data point was a 1.7 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.The survey findings since December 2015 have seen a gradual decline 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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