by Doug Short, Advisor Perspectives/dshort.com
The Preliminary University of Michigan Consumer Sentiment for October came in at 86.4, a rise from the September Final of 84.6. This is the highest level since July 2007. Today’s number was above the Investing.com forecast of 84.1.
See the chart below for a long-term perspective on this widely watched indicator. 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 now 2 percent above the average reading (arithmetic mean) and 3 percent above the geometric mean. The current index level is at the 46th percentile of the 442 monthly data points in this series.
The Michigan average since its inception is 85.1. During non-recessionary years the average is 87.4. The average during the five recessions is 69.3. So the latest sentiment number puts us 17.1 points above the average recession mindset and 1.0 points below the non-recession average.
Note that this indicator is somewhat volatile with a 3.1 point absolute average monthly change. The latest month is a somewhat smaller 1.8 point change. 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 have been 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 general trend in the Michigan Sentiment Index since the Financial Crisis lows has been one of slow improvement. But we are now at a post-recession high.
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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