Michigan Consumer Sentiment Falls Below Expectation

Includes: DIA, IVV, SPY, VOO
by: Doug Short

The University of Michigan Consumer Sentiment preliminary number for December came in at 74.5, an attention-grabbing drop from the November final of 82.7. Friday's number was well below the Briefing.com consensus of 82.4.

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 13% below the average reading (arithmetic mean) and 12% below the geometric mean. The current index level is at the 25th percentile of the 420 monthly data points in this series.

The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.8. The average during the five recessions is 69.3. So the latest sentiment number of 74.5 puts us at the lower end of the range between the average non-recession and recession mindsets.

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 December preliminary reading is a lower number than analysts expected, but given the continuous focus on the Fiscal Cliff, we should not see the decline as all that surprising.