Michigan Consumer Sentiment Again Falls Below Expectation

by: Doug Short

The University of Michigan Consumer Sentiment preliminary number for January came in at 71.3, an unexpected decline from the December final of 72.9, which was also a surprise to the downside. The Briefing.com consensus was for 75.0 and Briefing.com's own forecast was for 76.0.

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 larger historical context since its beginning in 1978, consumer sentiment is 16% below the average reading (arithmetic mean) and 15% below the geometric mean. The current index level is at the 18th percentile of the 421 monthly data points in this series.

The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.7. The average during the five recessions is 69.3. So the latest sentiment number of 71.3 puts us a mere 2.04 above the average recession mindset.

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 are remarkably similar to the Michigan Index.

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 January preliminary reading is a lower number than analysts expected, but probably not surprising in light of the smaller paychecks for John and Jane Doe following the expiration of the FICA tax cut.