Michigan Consumer Sentiment: Highest Since July 2007

by: Doug Short

The University of Michigan Consumer Sentiment preliminary number for May came in at 83.7, a major advance over the April final reading of 76.4. This is the highest level since July of 2007, prior to the Great Recession. The Briefing.com consensus was for 78.5.

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 the larger historical context, since its beginning in 1978, consumer sentiment is now only 2% below the average reading (arithmetic mean) and 1% below the geometric mean. The current index level is at the 41st percentile of the 425 monthly data points in this series.

The Michigan average since its inception is 85.2. During non-recessionary years, the average is 87.6. The average during the five recessions is 69.3. So the latest sentiment number puts us about 14 points above the average recession mindset and 4 points 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 have been remarkably similar to the Michigan Index. It will be interesting to see if the next Conference Board number confirms the May preliminary Michigan improvement.

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 final reading was the third month of improving sentiment, but the April final moves us a couple of steps in the wrong direction. Now the preliminary May increase suggests that the consumer is finally shedding the recessionary mindset.