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Preliminary January 2013 Michigan Consumer Sentiment Drops Again

by Doug Short, Advisor Perspectives/dshort.com

The University of Michigan Consumer Sentiment preliminary number for January came in at 71.3, an unexpected decline from the December final of 72.9, which was also a surprise to the downside. The Briefing.com consensus was for 75.0 and Briefing.com’s own forecast was for 76.0.

See the chart below for a long-term perspective on this widely watched index. I’ve highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.

To put today’s report into the larger historical context since its beginning in 1978, consumer sentiment is 16% below the average reading (arithmetic mean) and 15% below the geometric mean. The current index level is at the 18th percentile of the 421 monthly data points in this series.

The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.7. The average during the five recessions is 69.3. So the latest sentiment number of 71.3 puts us a mere 2.04 above the average recession mindset.

It’s important to understand that this indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-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 are remarkably similar to the Michigan Index.

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).

The trend in sentiment since the Financial Crisis lows has been one of slow improvement. We saw a major drop in sentiment in 2011 followed by a rapid return to the general trend of higher highs. The January preliminary reading is a lower number than analysts expected but probably not surprising in light of the smaller paychecks for John and Jane Doe following the expiration of the FICA tax cut.

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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