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Michigan Sentiment: Highest Since October 2007?!

  • Written by Syndicated Publisher 2 Comments2 Comments Comments
    May 26, 2012

    The University of Michigan Consumer Sentiment Index Final number for May came in at 79.3, which is the highest reading since October 2007, two months before the NBER’s date for the onset of the last recession. Today’s number was above the Briefing.com‘s consensus forecast of 77.5.

    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 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 about 7% below the average reading (arithmetic mean), 6% below the geometric mean, and 7% below the regression line on the chart above. The current index level is at the 32.7 percentile of the 413 monthly data points in this series.

    The Michigan average since its inception is 85.5. During non-recessionary years the average is 88.0. The average during the five recessions is 69.3. So the latest sentiment number of 79.3 puts us just above the midpoint (78.7) between recessionary and non-recessionary sentiment averages.

    The 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 updatehere). 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. The steady rise since the August trough has been encouraging. And today’s report is another welcome continuation of the trend, despite the ongoing media focus on the financial anxieties in the Eurozone.

     

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.

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