Preliminary July 2012 Michigan Consumer Sentiment Gets the Summer Blues

by Doug Short, Advisor Perspectives/

The University of Michigan Consumer Sentiment Index preliminary number for June came in at 72.0, a 1.2 point drop from the June final and a whopping 7.3 point decline from May. We’ve apparently got a case of the summer blues on our hands. Today’s number was below the’s consensus forecast of 73.5.

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 16% below the average reading (arithmetic mean), 15% below the geometric mean, and 15% below the regression line on the chart above. The current index level is at the 19.5 percentile of the 415 monthly data points in this series.

The Michigan average since its inception is 85.0. During non-recessionary years the average is 88.0. The average during the five recessions is 69.3. So the latest sentiment number of 72.0 puts us well below the midpoint (78.7) between recessionary and non-recessionary sentiment averages. In fact, we’re just a tad above the recession 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 had been one of slow improvement, but it topped out in February of last year at 77.5 and plunged to an interim low of 55.7 in August. The steady rise since the August trough had been encouraging. But today’s report continues to suggest a trend reversal.

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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One reply on “Preliminary July 2012 Michigan Consumer Sentiment Gets the Summer Blues”

  1. While I am in favor generally of using longer term averages, the repeal of Sarbanz/Oxley in 1999 change the playing field forever. “Free trade was not fair trade” and the rest of the equally intelligent companies/workers in the world have and continue to eat our lunch. There is pre-2000, and post-2000. Adjust your longer term trend line accordingly, and a much different picture emerges.
    On the whole, most of the averages you refer to are Much below average, and still declining. The Wealth of the World is being Normalized (They can and will do it as good or better for less)…this will take awhile. As I assess, this process will continue until 2020-2021…a long time. In the meantime, I keep it simple, trading, invest in the SPY, SSO, SPXL (bullish), and SH, SDS, SPXS (bearish). Recently, at $8.23 added RJA to the fundamental portfolio (technicals and global meteorogical instability and increasing mouths to feed as well as the inclination to gravitate to higher on the food line (meat).
    As applied to your charts, lower lows generally mean even lows. Like your work!

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