Michigan Consumer Sentiment Plunges To Recession Levels

Includes: PMR, RETL, RTH, XRT
by: Doug Short

The University of Michigan Consumer Sentiment preliminary number for March came in at 71.8, a substantial decline from the February final reading of 77.6. The Briefing.com consensus was for no change. Briefing.com's on estimate was for 79.0. The latest number takes us back to the range normally associated with recessions.

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 Friday's report into the 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 19th percentile of the 423 monthly data points in this series.

The Michigan average since its inception is 85.2. During non-recessionary years the average is 87.7. The average during the five recessions is 69.3. So the latest sentiment number puts us only 2.5 above the average recession mindset and 15.9 below the non-recession average.

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.

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 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 March preliminary reading is much lower than analysts expected. Apparently the impact of smaller paychecks for John and Jane Doe following the expiration of the 2% FICA tax cut and the upward trend in gasoline prices have taken their toll on the consumer's state of mind.