Michigan Consumer Sentiment Shows a Sharp Downturn

Fri, Apr 12, 2013 - 9:15am

The University of Michigan Consumer Sentiment preliminary number for April came in at 72.3, a hefty drop from the March final reading of 78.6. The Briefing.com consensus was for 78.0. The latest number takes us back to a level associated with recessionary consumer sentiment.

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 15% below the average reading (arithmetic mean) and 14% below the geometric mean. The current index level is at the 20th percentile of the 424 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 a mere three points above the average recession mindset and 15.3 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 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 March final reading was the third month of improving sentiment, but the April preliminary number is the lower than any final monthly sentiment reading since December 2011. Perhaps we'll see some improvement from the preliminary data and final sentiment number, due out on April 26th.

Source: Advisor Perspectives

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