Paulo's Econ Watch

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US Univ. of Michigan Sentiment: inflation expectations at lowest rate ever recorded

Posted on October 30th, 2015

Main takeaways:

Final Michigan Sentiment in October at 90.0, down 2.1 points from the preliminary estimate.
This was largely due to less favorable assessments of buying conditions (due to fewer discounts).
The overall tone of the report was very positive (see quotes below).
Historical episodes show that real consumption grows in the 2.5%-4.0% range while Sentiment is near current levels.
5-10y inflation expectation ticked down to 2.5%, the lowest rate ever recorded.

Additional highlights in the report:

"Confidence retreated in late October largely due to less favorable assessments of buying conditions"
"Largest gain was among households in the bottom third of the income distribution"
"Future financial prospects were viewed more favorably by all households than anytime since 2007"
"Consumers remain sensitive to pricing, with small decline in buying plans since mid month due to fewer price discounts than had been anticipated"
"Consumers voiced a somewhat greater willingness to use savings and debt to make major purchases"
"Net income gains were reported by the highest number of households with incomes in the bottom third in the past ten years"
"Households expressed a degree of financial optimist unseen since mid-2007"
"Two-thirds of all consumers reported hearing news of negative economic developments in early October, unchanged from September"
"News of job losses were reported slightly more frequently than job gains, the weakest in more than a year"
"October's 2.5% long term inflation rate ties the lowest rate ever recorded"

The final reading for October's Univ. of Michigan Sentiment rebounded from September (90.0 vs 87.2).

Looking closer at the relationship between Michigan Sentiment and household consumption:

The chart below plots the 3mma of Michigan Sentiment in the x-axis and real consumption (3mma, YoY) in the y-axis. The vertical black line shows the most recent monthly print. The expected growth rate of consumption based on the latest Sentiment reading would be close to 3.1%.

Perhaps even more important, the current level of Sentiment is compatible with consumption growth in the 2.5%-4.0% range, with a few outliers above this range and no episode of consumption growth below 2% in the vicinity of the current level for Michigan Sentiment.

Inflation expectations ticked down to 2.5%, the lowest rate ever recorded (since Sep/2002)

US Univ. of Michigan Sentiment: up sharply in October, fully recovering from lats month's drop

Posted on October 16th, 2015

Main takeaways:

Preliminary Michigan Sentiment up sharply in October, fully recovering from lats month's drop.
This rebound was important - it shows consumers shrugged off volatility and equity prices drop in the last couple of months.
Sentiment improved mostly among the bottom two-thirds of income distribution.
Historical episodes show that real consumption grows in the 2.4%-4.6% range while Sentiment is near current levels.
5-10y inflation expectation ticked down a bit, but remains broadly sideways.

Additional highlights in the report:

"...renewed confidence did not simply represent a relief rally, but reflected renewed optimism"
"personal financial expectations rose to their highest level since 2007"
"most of the recent gains were among households in the bottom two-thirds of the income distribution"
"net income gains were reported by the highest number of households with incomes in the bottom third in the past ten years"
"two-thirds of all consumers reported hearing news of negative economic developments in early October, unchanged from September"
"consumers held the least favorable prospects for the unemployment rate in more than a year"
"all of the weakening job prospects were reported by middle income households"
"declines in prices helped all households, especially among lower income households" [meanwhile the Fed is trying to change that...]

The preliminary reading for October's Univ. of Michigan Sentiment rebounded from September (92.1 vs 87.2).

Looking closer at the relationship between Michigan Sentiment and household consumption:

Perhaps even more important, the current level of Sentiment is compatible with consumption growth in the 2.4%-4.6% range, with a few outliers above this range and no episode of consumption growth below 2% in the vicinity of the current level for Michigan Sentiment.

Inflation expectations ticked down a bit.

US Univ. of Michigan Sentiment: losses in household wealth triggered sharp move down in sentiment

Posted on September 11th, 2015

Main takeaways:

Preliminary Michigan Sentiment down sharply to 85.7 in September (from 91.9 in August).
This mostly reflects losses in household wealth -- which offset more benign views on employment.
There was, however, an improvement intra-month; sentiment had dropped 9 points in the aftermath of stock market 'mini-crash'.
Historical episodes show that real consumption grows in the 2%-3.5% range while Sentiment is near current levels.
It is important to watch if this was a one-off drop in confidence or the start of a downtrend.
5-10y inflation expectation ticked up a bit, but remains broadly sideways.

The preliminary reading for September's Univ. of Michigan Sentiment was sharply down (85.7 vs 91.9).

Would that drop mean a sharp slowdown in consumption (as hinted by the chart below)?

Let's take a closer look at the relationship between Michigan Sentiment and household consumption. The chart below plots the 3mma of Michigan Sentiment in the x-axis and real consumption (3mma, YoY) in the y-axis. The vertical black line shows the most recent monthly print. The expected growth rate of consumption based on the latest Sentiment reading would be close to 2.5%.

Perhaps even more important, the current level of Sentiment is compatible with consumption growth in the 2%-3.5% range with no episode of consumption growth below 2% while the Sentiment index was around the current level.

Inflation expectations ticked up a bit, but remain broadly sideways.