by Doug Short, Advisor Perspectives/dshort.com
The University of Michigan Final Consumer Sentiment for November came in at 91.6, a drop from the 93.1 November Preliminary reading. Investing.com had forecast a more optimistic 93.1.
Surveys of Consumers chief economist, Richard Curtin makes the following comments:
Although some of the gains recorded earlier in the month evaporated in late November, consumer confidence remained quite favorable, just below the average for the past six months 91.6. Other than for the past twelve months, the Sentiment Index was higher in November than any time since the start of 2007. Nonetheless, the data indicate that consumers have become increasingly aware of economic cross currents in the domestic as well as the global economy. Nearly all of the recent advance was focused on current conditions rather than future economic prospects, and the entire November gain was due to lower income households. Households with incomes in the top third of the distribution, who account for more than half of all spending, expressed a more cautious optimism. This more guarded outlook reflected somewhat weaker personal financial prospects and a greater insistence that their purchases will be contingent on the availability of discounted prices and reduced interest rates. To be sure, the resilience of consumers has steadied the course of the macroeconomy during the past few years.. Overall, the data are consistent with growth in real personal consumption spending of 2.8 in 2016.
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.
To put today’s report into the larger historical context since its beginning in 1978, consumer sentiment is 7.0 percent above the average reading (arithmetic mean) and 8.3 percent above the geometric mean. The current index level is at the 61st percentile of the 455 monthly data points in this series.
The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.5. 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 3.8 points above the non-recession average.
Note that this indicator is somewhat volatile, with a 3.1 point absolute average monthly change. The latest data point was 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.
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 the survey findings since December have been relatively range bound with January 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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