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posted on 29 April 2016

Final April 2016 Michigan Consumer Sentiment Continues Slow Decline

by Doug Short, Advisor Perspectives/

The University of Michigan Final Consumer Sentiment for April came in at 89.0, a 2.0 point decrease from the 91.0 March Final reading. had forecast 90.0.

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

Consumer sentiment continued its slow decline in late April due to weakening expectations for future growth, although their views of current economic conditions remained positive. All of the April decline was in the Expectations component, which fell by 4.8% from one month ago and by 12.6% from a year ago and by 14.7% from its January 2015 peak. The retreat from the 2015 peaks was evident across a wide range of expectations about prospects for the national economy. The size of the decline, while troublesome, is still far short of indicating an impending recession. The decline is all the more remarkable given that consumers' assessments of current economic conditions, including their personal finance, have remained largely unchanged at very positive levels during the past year. This divergence may reflect the strength of the consumer relative to the business sectors, and may have been exacerbated by growing uncertainty about the economic policies advocated by various presidential candidates. Overall, the data indicate that inflation-adjusted personal consumption expenditures will grow by 2.5% 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 4.3 percent above the average reading (arithmetic mean) and 5.5 percent above the geometric mean. The current index level is at the 51st percentile of the 460 monthly data points in this series.

The Michigan average since its inception is 85.4. During non-recessionary years the average is 87.6. The average during the five recessions is 69.3. So the latest sentiment number puts us 19.7 points above the average recession mindset and 1.4 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 2.0 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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