Why Declining Consumer Sentiment Is Bad News In 3 Charts

by: Chris Puplava

By Chris Puplava

Michigan's Consumer Sentiment Index (in black) came in for April at 89.7, below the Bloomberg consensus of 92.0, and fell from March's 91.0 reading. The souring sentiment by consumers is also being shared by small-business owners as measured by the NFIB Small Business Optimism Index (in red). A continued - or quite sudden - decline from current levels raises the risk of entering a recession.

Interestingly, there is a positive correlation between the Michigan Consumer Sentiment Survey and the S&P 500 P/E ratio. A lower sentiment reading tends to coincide with a lower multiple for the market and vice-versa. A continued erosion in consumer sentiment may indicate investors will be less willing to pay for stocks at the current valuation.

Souring consumer sentiment does not bode well for the labor markets, as declining sentiment (shown inverted below) tends to coincide with rising unemployment. Note: Although the two tend to move in the same direction, divergences can, and do, happen (see the 2005-2007 period). As we showed last week, the percentage of small business complaints reporting sales as their most important problem has an even stronger relationship over time (see here).