Consumer Sentiment Shocks to the Downside

The University of Michigan Consumer Sentiment Index preliminary report for March came in at 68.2, down from 77.5 in February and a stunning reversal from the recent trend of improving sentiment. The consensus expectation had been for 76.5 and’s own forecast was for 78.0.The survey’s measure of current economic conditions dropped to 83.6, from 86.9 the month before. Consumer expectations fell to 58.3 from 71.6, the lowest level since March 2009.

Consumer inflation expectation rose to 4.6 percent from 3.4 percent in February, the highest since August 2008. The 5-10-year inflation outlook rose to 3.2 percent from 2.9 percent. The increase in gasoline prices was no doubt a factor.

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 Michigan Consumer Sentiment Index as an indicator of the broader economy.

To put today’s report into the larger historical context since its beginning in 1978, consumer sentiment is about 21% below the average reading (arithmetic mean), 20% below the geometric mean, and 22% below the regression line on the chart above. The current index level is at the 13th percentile of the 399 monthly data points in this series.

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 general pattern and trend 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).

 Consumer and small business sentiment remains at or near levels associated with other recent recessions, but the trend has been one of strong improvement. We now must wonder if the latest Michigan reading foreshadows a reversal in other sentiment indicators.

Related Articles

NFIB:  Small Business Sentiment Improves Slightly  by Doug Short

Michigan Consumer Sentiment Index:  Best level in over Three Years  by Doug Short

Consumer Confidence at Three Year High but Still Low  by Doug Short

CMI:  Consumer Weakness Continues  by Rick Davis

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