Preliminary November 2012 Michigan Consumer Sentiment at Post Recession High

by Doug Short, Advisor Perspectives/

The University of Michigan Consumer Sentiment preliminary number for November came in at 84.9, well above the November final of 82.6. Today’s number handily beat the consensus of 83.0. This is the highest sentiment level since July 2007.

It will be particularly interesting to see if November final will confirm the improvement in the mood of the consumer.

See the chart below for a long-term perspective on this widely watched index. Prior to the last recession, the sentiment index had been trending upward since its inception in 1978, so I 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. The first thing I noticed in today’s update of this chart is that sentiment has finally moved fractionally above the regression, and the regression has essentially become a flat line. I’ll probably retire the trendline after this update.

To put today’s report into the larger historical context since its beginning in 1978, consumer sentiment is only 1% below the average reading (arithmetic mean), but it is 1% above the geometric mean, and virtually spot on regression line in the chart above. The current index level is at the 42nd percentile of the 419 monthly data points in this series.

The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.8. The average during the five recessions is 69.3. So the latest sentiment number of 84.9 moves us significantly closer to the non-recession sentiment averages.

It’s important to understand that this 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 presidential election, periodically grim news from the eurozone and uncertainties about the “fiscal cliff” dominated the news. But the November preliminary number of 84.9 seems to be confirming a breakthrough to the upside.

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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