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posted on 11 November 2016

Preliminary November 2016 Michigan Consumer Sentiment Increases, Improved Outlook

by Doug Short / Jill Mislinski, Advisor Perspectives/dshort.com

The University of Michigan Preliminary Consumer Sentiment for November came in at 91.3, up from the October Final reading and higher than the 2016 average. Investing.com had forecast 87.5.

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

The Sentiment Index in early November erased the small October decline to climb to its highest level since mid 2016 and rise slightly above the 2016 average of 91.1. The recent gain in sentiment was driven by an improved outlook for the economy. The most striking finding in early November was that both near and long-term inflation expectations jumped to 2.7% from last month's record matching lows of 2.4%. These increases must be replicated before they can be taken to indicate a troublesome development; thus far, the data has simply repeated the March 2016 peaks. Nonetheless, it may be viewed as added justification for next month's expected interest rate hike. The expected small increase in interest rates had little impact on favorable buying attitudes, and still supports a 2.5% increase in real consumer spending during 2017. Unfortunately, the November data must be accompanied by the proviso that it was collected before the result of the Presidential election was known late Tuesday.

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 6.8 percent above the average reading (arithmetic mean) and 8.1 percent above the geometric mean. The current index level is at the 60th percentile of the 467 monthly data points in this series.

The Michigan average since its inception is 85.5. 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 22.0 points above the average recession mindset and 3.7 points below the non-recession average.

Note that this indicator is somewhat volatile, with a 3.0 point absolute average monthly change. The latest data point saw a 3.3 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.The survey findings since December 2015 saw gradual decline followed by a bounceback later in the year, 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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