Preliminary September 2013 Michigan Consumer Sentiment Has Downside Surprise

by Doug Short, Advisor Perspectives/

The University of Michigan Consumer Sentiment preliminary number for September came in at 76.8. Today’s number is surprisingly lower than the forecast of 82.0 and a 5.3 plunge from the August final reading of 82.1.

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.

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To put today’s report into the larger historical context since its beginning in 1978, consumer sentiment is now 10 percent below the average reading (arithmetic mean) and 9 percent above the geometric mean. The current index level is at the 29th percentile of the 429 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 7.5 points above the average recession mindset and 10.8 points below the non-recession average.

It’s important to understand that this indicator is somewhat volatile with a 3.1 point absolute average monthly change. 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.

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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).

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The trend in sentiment since the Financial Crisis lows has been one of slow improvement, but today’s number is a move in the wrong direction.

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 September 2013 Michigan Consumer Sentiment Has Downside Surprise”

  1. Short does not seem to know what matters, or likes charts even if they add little or nothing.  Consumer sentiment is a co incident indicator with almost no forecasting value. NFIB sentiment is interesting, but like consumer sentiment not well related to other economic data about NFIB members;  it is probabily of less value than Consumer data, but it fills a page or two.  On the other hand, consumer household incomes are useful in suggesting where personal consumption (demand) is tending in an economy. He might have added that consumers are incurring debt and dissaving more this month that in past quarters.  When PCE declines it is a prelude to a decline in production and could, with an ~ 70% probability, lead to an economic slow down in 3 to 6 months, but not a recession without more.  In the context of the Budget and Debt ceiling bargaining now brewing this trend is worth watching, it suggests that the economy is vulnerable, and that might make consumers reluctant to own stocks, and that is what people like me read this blog to learn.  No offense, but Occum did note that the most simple explanation was the preferred. I agree Dr. Short.

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