What Does Consumer Sentiment Mean In Terms of Recession

Hmmm, we seem to be tangentially looking at a lot of sentiment data today. Let’s stop beating around the bush, and look at the most recent sentiment data. From last week’s University of Michigan we learn that U.S. Consumer Sentiment dropped to 28-year low.

That’s right, we are back to sentiment malaise levels pre-Reagan.

Peter Boockvar of Miller Tabak notes:

The
April preliminary U of Michigan confidence # fell to 59.5, the lowest since June
1980. Present conditions fell to 71.7 from 77 and the Outlook fell to 51.7 from
53.3. One year inflation expectations rose to 5.2% from 4.8%, the highest since
1982. Message to the Fed, inflation expectations are not ‘well anchored’ and
price stability is in danger the longer people believe inflation is going higher
as it feeds on itself.

The key though is whether employees start asking for
raises to deal with higher prices (fed the inflation in the ’70s) but with a
softening labor market, their leverage is limited thus furthering the pressure
on after inflation wages. The implied inflation rate in the 10 yr TIPS is at
2.471%, a touch less than 2 month highs reached on Wednesday of
2.474%.

Does the freefall in consumer sentiment suggest anything in terms of our earlier question: Are we in a recession or not? What might that mean in terms of economic activity in the near future?

I am not sure, but this chart, via Michael Panzner, might help us determine what the most likely course:

Gdpconsumersentiment
Chart courtesy of Michael Panzner

Good stuff — thanks Mike.

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  1. skeptical commented on May 19

    I find it very interesting that Goldman came out with a “conviction buy” rating on Amazon today:

    http://www.bloomberg.com/apps/news?pid=20601110&sid=afILpBARBv.g

    While at the same time, they are on record predicting oil at $150 – $200 per barrel this year.

    It seems to me that these two predictions are mutually exclusive – I am not buying the fairy tale that we don’t drive to the mall anymore so we will start buying everything from Amazon.

    Since it’s understood that GS “talks its book”, but also understood that they shorted subprime while recommending it to their clients, I’m curious if they are “talking their book” long, with oil, and ramping up Amazon to unload it before it cuts in half.

    Ski-slope drops in consumer sentiment and self-professed $200 oil targets have never led me to a “convicted buy” of a retailer that only sells non-essentials…

    Comments ?

  2. johnnyvee commented on May 19

    Its difficult to comprehend statistics that measure consumer sentiment in the context of time. What does it mean that consumer sentiment is lower than the year 2000, 1990, or 1980. Is there an inflationary effect to consumer confidence that I am not aware? Should we expect a 2-3% increase in consumer confidence per year b/c the fed is creating consumer confidence similar to the money supply?

  3. ReturnFreeRisk commented on May 20

    Johnnyvee,
    Consumer sentiment is the equivalent of CHANGES in real consumer spending. So inflation does not enter the equation.

  4. Jim Haygood commented on May 20

    There’s an error in the recession labeling on Panzner’s chart. There were “double-dip” recessions in 1980 and 1981-1982, respectively. But the second dip isn’t shown.

    As stated before, I would have identified a “double-dip” in 2002-2003 as well. You can see on the chart where consumer confidence printed a lower low in early 2003, as GDP took a fresh dip.

    If it weren’t for the absurd official lies about inflation, we would already have had a negative-growth quarter in 1Q 2008, with a second one underway now.

  5. Charlie commented on May 20

    That chart looks pretty convincing that we are probably in the midst of an official recession now. We won’t know if we’re in a recession until October and may know we’re not in one in August if 2Q GDP growth isn’t neagative.

  6. lark commented on May 20

    One reason consumer sentiment may be so low is that employees know perfectly well their leverage to “ask” (beg?) for higher wages is very low. No wage price spiral here: just a price spiral. Thanks to all our free market friends!

  7. Formerly known as… commented on May 20

    I’m not familiar with all the details on how the UM Sentiment report is built but it seems to me that today’s numbers though similar with those of the late 70’s early 80’s are not equivalent at all. I’m sorry but economic times back in the late 70’s was the pits compared to current times. I personally think we have just become soft, lazy and content with good times over the last 25 years.

  8. AGG commented on May 20

    28 Years ago the inflation rate was around 13%. I believe that consumer sentiment is directly proportional to consumer buying power AND job security (what job security?). People get it no matter how much Orwellian cognitive dissonance the media thows at us.

  9. johnnyvee commented on May 20

    ReturnFreeRisk

    Thanks, but I was was just being sarcastic. What I was trying to state by sarcasim is that today’s sentiment numbers when compared to other time periods, to have an relevance, need to be put in context with the economic troubles today compared to then. Otherwise, its hard to determine the point the writer is trying to make.

  10. JonSpence commented on May 20

    It seems to me that the pre-Reagan malaise was followed from moments that were politically depressing. I think that my point here is that people have not attributed the current mayhem (aka – low cons. confidence, high crude, lingering inflation, etc) to a crisis of leadership. Read this interesting article, maybe some might be interested.

    http://www.cfapubs.org/doi/abs/10.2469/cfm.v19.n3.9

    Basically, it states the necessity of understanding the onnection between the behavioral traits and the bottom line performance of CEOs. I think that it applies to leaders in general. So, on that account, it is obvious that we have a 28y low consumer sentiment. The entire system is in crisis. Depending on the way the elections are conducted for the remainder of 2008 – maybe we are able to begin 2009 with some true leadership that is going to instill confidence into the system and stimulate indicators such as consumer confidence.

  11. pkut commented on May 20

    gee, I wonder why there was a big drop off in consumer sentiment in 04 without a similar change in gdp? why the disconnect? was something going on in 04? hmmmmm

  12. IdahoSpud commented on May 20

    Pre-Reagan? Don’t you *really* mean “Carter-era”?

    C’mon Barry, go ahead and put Bush II and Carter in the same sentence! ;)

    ~~~

    BR“: Pre-Reagan. He was the pres who returned sentiment back to normal . . .

    He followed the 1970s malaise that was part Nixon (Vietnam and Watergate), part Carter (stagflation).

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