Michigan Consumer Sentiment Has A Recession Mentality

by Doug Short

The University of Michigan Consumer Sentiment Index final report for July came in at 63.7, a drop from the 71.5 June final number but only 0.1 below the July preliminary reading of 63.8. The Briefing.com consensus expectation had been for 63.8 and Briefing.com’s own forecast was for an even more depressing 62.5. The July final is the lowest since March 2009.

See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I’ve added a linear regression to help understand the pattern of reversion to the trend. I’ve also 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 about 26% below the average reading (arithmetic mean), 25% below the geometric mean, and 27% below the regression line on the chart above. The current index level is at the 5th [!] percentile of the 403 monthly data points in this series.

The Michigan average over since its inception is 85.9. During non-recessionary years the average is 88.6. The average during the five recessions is 69.3.

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 general pattern and trend 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).

Consumer and small business sentiment remains at levels associated with other recent recessions. The trend in sentiment since the Financial Crisis lows has been one of general improvement. But the July preliminary and final numbers constitute a giant step backward.

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