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posted on 17 March 2017

Preliminary March 2017 Michigan Consumer Sentiment Remains Favorable

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

The University of Michigan Preliminary Consumer Sentiment for March came in at 97.6, up from the February Final reading of 96.3. Investing.com had forecast 97.0.

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

The overall level of consumer sentiment remained quite favorable in early March due to renewed strength in current economic conditions as well as the extraordinary influence of partisanship on economic prospects. The Current Economic Conditions component reached its highest level since 2000, largely due to improved personal finances. While current economic conditions were not affected by partisanship, this was not true for the component about future economic prospects: among Democrats, the Expectations Index at 55.3 signaled that a deep recession was imminent, while among Republicans the Index at 122.4 indicated a new era of robust economic growth was ahead. Interestingly, those who self-identified as Independents had an Expectations Index of 88.3, which was nearly equal to the midpoint of the partisan difference. Importantly, there was no moderation in these extreme views from last month, with the maintenance of the partisan divide fueled by selective attention to economic news, with Democrats more frequently reporting unfavorable developments and Republicans more frequently hearing of favorable changes. Overall, the sentiment data has been characterized by rising optimism as well as by rising uncertainty due to the partisan divide. Optimism promotes discretionary spending, and uncertainty makes consumers more cautious spenders. This combination will result in uneven spending gains over time and across products. [More...]

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 14.1 percent above the average reading (arithmetic mean) and 15.4 percent above the geometric mean. The current index level is at the 87th percentile of the 471 monthly data points in this series.

The Michigan average since its inception is 85.6. During non-recessionary years the average is 87.7. The average during the five recessions is 69.3. So the latest sentiment number puts us 28.3 points above the average recession mindset and 9.9 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 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.The survey findings since December 2015 saw gradual decline followed by a bounceback later in the year with its interim peak in January of 2015.

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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