Consumer sentiment in Michigan falls to 8-month low

According to the preliminary report on the Michigan Consumer Sentiment Index, consumer sentiment fell to an eight-month low in July. The index fell 2.2 points (-3.2%) from the last reading in June to 66.0. The latest reading was below the forecast of 68.5.

The Michigan Consumer Sentiment Index is a monthly survey conducted by the University of Michigan on consumer confidence in the United States regarding the economy, personal finances, business conditions and purchasing conditions. Two reports are released each month: a preliminary report at the middle of the month and a final report at the end of the month.

Joanne Hsu, the poll director, made the following comments:

For the second month in a row, consumer sentiment has remained essentially unchanged. The value for July was statistically insignificant at 2 index points below the previous month and thus well within the margin of error. Although the sentiment more than 30% above the June 2022 low, but remains stubbornly subdued. Nearly half of consumers remain bothered by the impact of high prices, even as they expect inflation to continue to moderate in the years ahead. With elections looming, consumers perceived considerable uncertainty about the economic outlook, although there is little sign that the first presidential debate changed their economic views. Inflation expectations for the year ahead fell for the second month in a row, reaching 2.9%. By comparison, these expectations ranged between 2.3% and 3.0% in the two years before the pandemic. Long-term inflation expectations were 2.9%, down from 3.0% last month, and have remained remarkably stable over the past three years. Compared with 2.2-2.6% in the two years before the pandemic, these expectations are still somewhat elevated.

For a long-term perspective on this widely followed indicator, see the chart below. We’ve highlighted the index value at the start of each recession and also provided the last 12 months. The current reading of 66.0 is below the index value at the start of 6 of the 6 recessions since the index was introduced.

To put today’s report into the larger historical context, since its inception in 1978, consumer sentiment is 22.2% below its average (arithmetic mean) reading of 84.8 and 21.2% below its geometric mean of 83.7. The current index level is at the 10th percentile of the 559 monthly data points in this series.

This indicator is somewhat volatile, with an absolute average monthly change of 3.1 points. The last data point recorded a decrease of 2.2 points from the previous month. To get a visual sense of the volatility, here is a chart with the monthly data and a three-month moving average. The bottom half of the chart shows real GDP to help us assess the correlation between the Michigan Consumer Sentiment Index and the overall economy.

Other sentiment indicators

Another perspective on consumer attitudes is provided by the Conference Board’s latest Consumer Confidence Index. Both indexes measure consumer attitudes toward the current and future strength of the economy. However, the Consumer Confidence Index is more influenced by employment and labor market conditions, while the Michigan Sentiment Index focuses more on household finances and the impact of inflation.

The Conference Board Index is the more volatile of the two, but the overall pattern and trends bear a striking resemblance to the Michigan Index.

Finally, the prevailing sentiment in the Michigan survey is also similar to the sentiment among small business owners as measured by the NFIB Business Optimism Index (monthly update here).

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Editor’s note: The summary points for this article were selected by the editors of Seeking Alpha.