by Doug Short, Advisor Perspectives/dshort.com
The University of Michigan Consumer Sentiment final number for May came in at 84.5, up from the 83.7 preliminary reading and a major advance over the April final reading of 76.4. This indicator remains at the highest level since July of 2007, prior to the Great Recession. The Briefing.com consensus was for the index to remain unchanged at its May preliminary level of 83.7.
See the chart below for a long-term perspective on this widely watched index. I’ve 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 now only 1% below the average reading (arithmetic mean) and is spot on the geometric mean. The current index level is at the 42nd percentile of the 425 monthly data points in this series.
The Michigan average since its inception is 85.2. During non-recessionary years the average is 87.6. The average during the five recessions is 69.3. So the latest sentiment number puts us about 15 points above the average recession mindset and 3 points below the non-recession average.
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 have been remarkably similar to the Michigan Index. It will be interesting to see if the next Conference Board number confirms the May preliminary Michigan improvement.
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 has been one of slow improvement. We saw a major drop in sentiment in 2011 followed by a rapid return to the general trend of higher highs. The March final reading was the third month of improving sentiment, but the April final moved us a couple of steps in the wrong direction. Now the May surge suggests that the consumer is finally shedding the recessionary mindset.
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.
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