Surprising Surge in Consumer Sentiment Bullish for Economy

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The final May reading for the University of Michigan Consumer Sentiment Survey came out today at 79.3, above the 77.8 consensus estimate and above April’s 76.4 reading. The 79.3 reading puts the survey at its highest level in four years as improvement was seen in both the present conditions index and the expectations index. The rise in consumer sentiment is a good sign for manufacturing and the economy overall.

Surging Sentiment

Consumer attitudes are highly correlated to the economy and we typically see consumer turn pessimistic heading into and during a recession and then surge afterwards as things improve. Shown below is the six month rate of change (6-Mo ROC) for the Michigan Consumer Sentiment Survey which shows the strongest surge in the data in more than three decades (November 1980)!

university of michigan consumer sentiment 6 mo change
Source: Bloomberg

This is good news for the manufacturing sector as well as the stock market as the ISM and the rate of change in the S&P 500 are highly correlated to the year-over-year (YOY) change in the Michigan Sentiment Survey. The jump in the survey suggests that manufacturing activity should improve and with it the stock market.

sentiment ism
Source: Bloomberg

The strong May reading of the above is bullish for the overall economy as it is also highly correlated with real GDP growth rates and suggests the ECRI’s recession call is likely to be a false alarm.

sentiment gdp
Source: Bloomberg

Housing Likely the Biggest Culprit for Sentiment Surge

Housing in the U.S. is stabilizing and in some regions actually advancing. Given that housing is one of the biggest asset classes for the U.S. consumer, improvement in in this sector after years of strong declines is certainly something to smile about. Correlated with the recent surge in consumer sentiment is a surge in the NAHB Housing Market Index with both at levels not seen since 2007-2008. If housing continues to improve we are likely to see continued improvement in the Michigan Sentiment survey and general economy.

sentiment housing
Source: Bloomberg

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