Consumer Sentiment: Always Darkest Before the Dawn

The early March preliminary Reuters/Michigan consumer sentiment survey results were bad enough, coming in at 70.5 and they got worse when they were finalized at 69.5 in late March.

“A recession has occurred whenever the Sentiment Index has declined as much as it has fallen during the past year, including the recessions occurring from the mid 1950’s to the early 2000’s,” according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers.

The full press release is available on the Reuters/Michigan website and also in my box of free trading goodies (in the Articles & Reports folder, named “Michigan Consumer Survey March 2008″).

A recession you say? Well, I’ll be!

There are several measures that Reuters/Michigan tracks. One of them is the “expectations index” which looks ahead to quantify how consumers see their future. In March 2008, this index hit the lowest (47.9) it has been since the 1973 recession (45.2).

Yes, you read that right. Today, U.S. consumers feel almost as hopeless about the future, as they did in the days of the oil shock, a brutal bear market, the rationing of gas (depending on your plate number), etc. Unbelievable!

Here’s a historical chart of the Reuters/Michigan survey going back to early 1970’s:

click to enlarge

As you’ve probably surmised by now, each time that consumer sentiment has scraped the bottom of the graph, the stock market and the economy have stopped their decline.

Starting with 1975, this was the end of the brutal bear market. Although equities didn’t bounce back, they stopped declining and entered a period of consolidation.

The early 1980’s saw the break out from this consolidation and the launch of the great secular bull market.

In 1990, the consumer sentiment spiked lower and the stock market followed with another significant long term bottom. Subsequent shocks in 1992 and 1993 don’t show a concomitant reaction from the market.

The next time consumer confidence approached such levels was in early 2003, which was the bottom of the bear market that followed the bursting of the tech bubble.

And now we are once again approaching these same levels. Which makes me wonder: Why don’t consumers have a long term memory? Collectively we seem to react with the IQ and recall ability of a one cell amoeba.

Here are some more historical charts of consumer sentiment as measured by the Michigan University survey.

Comments

[Bill W.]

This recession or pending depression is not like others because it's cause is completely different from those in the past. Think Adjustable Rate Mortgages (ARM) resets, which have resulted in declining home prices, foreclosures, declining home values, increase in credit card debt, Credit Default Obligation (CDO) devaluation, bank credit tightening, decrease in home demand, and on and on.

I believe we will see a direct connection with ARM resets and negative investment bank profits (which will be hidden until thier quatertly statements are released). So, this is not the end, this is the beginning of the end.

Respectfully,

Bill W.

[galewhitaker]

"This time its different." Never before in history has energy been this expensive in relation to the income of consumers. Nerver before in history has the world run out of cheap and easy to get light sweet crude. It may take quite awhile for the economy (built on $30 oil) to adjust to $150 oil. We humans have been greedy and stupid in that we have wasted our one time allocation of light sweet crude by pouring it down the throats of "the world's most dangerous cars" (SUVs). Do you think that the price of oil is going to fall? There are 2 billion potential new car owners in China and India who are going to insure that the price of oil does not fall. If you think consumer sentiment is bad now wait until gasoline shortages begin.
Gale Whitaker

[ericinNE]

And if you think globally, wait until serious food shortages start hitting under-developed populations, followed by emerging market populations. (Think North Korea, China.)