Submitted by Econbrowser

From Haver.com:

Michigan Consumer Sentiment Down Yet Again

April 11, 2008

By Tom Moeller

• The preliminary reading of April consumer sentiment from the University of Michigan fell another 9.1% m/m to 63.2. Consensus expectations had been for a lesser decline to 69.0. The decline dropped sentiment to near its lowest level since 1982.

• The expectations component accounted for the largest part of the decline in April sentiment with an 11.1% m/m drop. The index is at its lowest since 1990. Expectations for personal finances fell out of bed with a 13.4% m/m drop (-23.6% y/y). Expectations for business conditions during the next year also fell a hard 8.7% (-51.7% y/y). Expectations for conditions over the next five years fell 11.1% m/m (-20.0% y/y).
• Opinions about government policy, which apparently influence economic expectations, fell 4.4% m/m (-28.6% y/y). The percentage of those surveyed who indicated that they thought government was doing a good job fell to the lowest level since 1992 and 43% had a poor opinion.
• The expectations component accounted for the largest part of the decline in April sentiment with an 11.1% m/m drop. The index is at its lowest since 1990. Expectations for personal finances fell out of bed with a 13.4% m/m drop (-23.6% y/y). Expectations for business conditions during the next year also fell a hard 8.7% (-51.7% y/y). Expectations for conditions over the next five years fell 11.1% m/m (-20.0% y/y).
• Opinions about government policy, which apparently influence economic expectations, fell 4.4% m/m (-28.6% y/y). The percentage of those surveyed who indicated that they thought government was doing a good job fell to the lowest level since 1992 and 43% had a poor opinion.
• The mean expectation for inflation during the next twelve months rose again last month to 5.6%, nearly the highest level since 1990.
• The current conditions index fell 6.9% m/m after a slight rise during March. The view of current conditions for buying large household goods fell hard (-24.3% y/y) and the view of current personal finances also fell sharply (-26.9% y/y).
• The University of Michigan survey is not seasonally adjusted. The reading is based on telephone interviews with about 500 households at month-end; the mid-month results are based on about 300 interviews….

Here’s the series over the past ten years (more at the Haver website).

Figure 1: University of Michigan: Consumer Sentiment Index, not seasonally adjusted, Index 1st Quarter 1966=100. Source: St. Louis Fed FREDII.See additional commentary by Jim Hamilton at the time of the announcement, and his post on the Conference Board indicator.

Given the startling nature of this release, one is driven to ask, do sentiment indices matter? From S. Ludvigson, 2004, “Consumer Confidence and Consumer Spending,” Journal of Economic Perspectives 18(2):

Despite the widespread attention given to surveys of consumer confidence, the mechanisms by which household attitudes influence the real economy are less well understood. Do consumer confidence surveys contain meaningful independent information about the economy, or do they simply repackage information already captured in other economic indicators? Do the surveys provide information about the future path of household spending, or do they reflect current or past events? Finally, do the surveys correspond neatly to any well-defined economic concept, or do they furnish only a nebulous barometer of household disposition?

This paper begins with an overview of how consumer confidence is measured and reported. It then evaluates what is known about the relationship between consumer attitudes and the real economy. The evidence suggests that the most popular survey measures do contain some information about the future path of aggregate consumer expenditure growth. However, much of that information can be found in other popular economic and financial indicators, and the independent information provided by consumer confidence predicts a relatively modest amount of additional variation in future consumer spending. Moreover, there is some evidence that consumer confidence surveys reflect expectations of income and non-stock market wealth growth, but evidence on the connection between these surveys and precautionary saving motives is mixed.

A more adamant conclusion regarding consumer surveys and future consumption comes from Dean Croushare:

The conjecture that began this article seemed sensible: The use of real-time data might have a better chance of showing that measures of consumer confidence could prove useful in forecasting. After all, the measures of consumer confidence could reflect what people know that has not yet been captured by government statistical agencies. However, in trying to predict consumer spending, evidently the measures of consumer confidence reflect other events affecting the economy and do not sufficiently tell us what people know that government statistical agencies do not know.

The bottom line: If you are forecasting consumer spending for the next quarter, you should use data on past consumer spending and stock prices and ignore data on consumer confidence.

So does this mean one should ignore these indices? No, none of the studies argues that particularly extreme point. Rather, the consensus seems to be that the consumer sentiment indices summarize extant data. To the extent that this is an accurate assessment, the following bit of news is not surprising. From Macroeconomic Advisers (as noted by RealTime Economics), here’s the latest estimate on February real GDP:

Figure 2: Log real GDP, in billions of Ch.2000$. Source: Macroeconomic Advisers, accessed 15 April 2008.RealTime Economics summarizes it the best:

Forecasting firm Macroeconomic Advisers updated its monthly GDP estimate for February, showing a 1.2% decline in February. It was the second largest one-month decline in the nearly 16-year history of the index, behind a 1.6% drop in September 2001.

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