The Consumer is Depressed

 The University of Michigan Consumer Sentiment Index final report for March came in at 67.5, down from 77.5 in February and fractionally below the 68.2 March preliminary reading. The consensus expectation had been for 68.0 and’s own forecast was for 69.0.

The survey’s Current Conditions Index dropped to 82.5, from 86.9 the month before. The Consumer Expectations Index fell to 57.9 from 71.6. The March sentiment drop was the 10th largest monthly change ever recorded, and the Expectations Index was the 5th largest decline on record.  GDP may be in recovery but consumer sentiment is in depression.

The survey’s chief economist, Richard Curtin, offers his overview in the latest report, which is entitled Rising Prices and Slowing Economic Growth:

The proximate cause of the sharp drop in confidence was the rise in gas and food prices. The more damaging cause, however, was that the fewest consumers in more than a half century expected income increases, and many fewer anticipated gains in their inflation-adjusted incomes. The data clearly indicate that the rate of real consumer spending will diminish, but the data do not indicate a renewed downturn is now on the horizon. Continued job gains are essential as even modest job losses could quickly shift consumers toward retrenchment. For now, consumers find discounts attractive, and remain willing to modestly increase their spending.

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 22% below the average reading (arithmetic mean), 21% below the geometric mean, and 23% below the regression line on the chart above. The current index level is at the 12th 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).

Click to View
Click for a larger image

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

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

Good Jobs Report – Employment Trends are Up  by John Lounsbury and Steven Hansen

Employment May Never Recover by John Lounsbury (Seeking Alpha)

Personal Income and Expenditures Show Joe Sixpack Sliding Back into Recession  by Steven Hansen

One reply on “The Consumer is Depressed”

Comments are closed.