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posted on 13 January 2017

Preliminary January 2017 Michigan Consumer Sentiment Mostly Unchanged

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

The University of Michigan Preliminary Consumer Sentiment for January came in at 98.1, down fractionally from the December Final reading. Investing.com had forecast 98.5.

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

Consumer confidence remained unchanged at the cyclical peak levels recorded in December. The Current Conditions Index rose 0.6 points to reach its highest level since 2004, and the Expectations Index fell 0.6 points which was lower than only the 2015 peak during the past dozen years. The post-election surge in optimism was accompanied by an unprecedented degree of both positive and negative concerns about the incoming administration spontaneously mentioned when asked about economic news. The importance of government policies and partisanship has sharply risen over the past half century. From 1960 to 2000, the combined average of positive and negative references to government policies was just 6%; during the past six years, this proportion averaged 20%, and rose to new peaks in early January, with positive and negative references totaling 44%. This extraordinary level of partisanship has had a dramatic impact on economic expectations. In early January, the partisan divide on the Expectations Index was a stunning 42.7 points (108.9 among those who favorably mentioned government policies, and 66.2 among those who made unfavorable references). Needless to say, these extreme differences would imply either strong growth or a recession. Since neither is likely, one would anticipate that both extreme views will be tempered in the months ahead. Nonetheless, it should be noted that among the majority of consumers who referred to neither positive nor negative views on government, the Expectations Index was a strong 90.9, supporting a real consumption growth of 2.7% in 2017.

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 14.7 percent above the average reading (arithmetic mean) and 16.1 percent above the geometric mean. The current index level is at the 88th percentile of the 469 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 28.8 points above the average recession mindset and 10.4 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 0.1 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 the latest just near its 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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