by Doug Short, Advisor Perspectives/dshort.com
The University of Michigan Consumer Sentiment preliminary number for October came in at 83.1, up from last month’s final level of 78.3. The Briefing.com consensus was for 78.5, although Briefing.com’s one forecast was closer to the mark at 82.0. Today’s report is the highest level since September 2007.
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 only 3% below the average reading (arithmetic mean), 1% below the geometric mean, and 2% below the regression line on the chart above. The current index level is at the 40th percentile of the 418 monthly data points in this series.
The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.9. The average during the five recessions is 69.3. So the latest sentiment number of 83.1 moves us significantly closer to the non-recession sentiment averages.
The 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 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 2011. The 79.3 peak in May of this year was followed by a summer slump of 72.3 in July, as stresses over the upcoming presidential election, grim news from the eurozone and uncertainties about the “fiscal cliff” dominated the news. But the October preliminary of 83.1 looks like a breakthrough to the upside.
Caveats on the Use of University of Michigan Consumer Sentiment
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.