Sober Look has two good, worth reading posts - "The story of two risk indices" and "The jump in U Michigan sentiment index is driven by consumer expectations". I'll try to return to the first post later but I thought I'd comment on the second one - which is about indicators tied to what we generally refer to as 'consumer sentiment' or 'consumer confidence'. SL makes some good points about these indices but he does not mention a larger point that I want to call out here - which is that these indices very clearly are not at all good gauges of absolute economic activity.
1) Let's start with SL's first point that the Thomson Reuters/University of Michigan's survey of consumer sentiment registered a reading in August 2011 that was as low as the reading in November 2008 - which, as SL says is "...a bit surprising and not at all intuitive, with anecdotal evidence suggesting that 08 felt far worse than 2011".
He's completely right about the non-intuitive nature of index values - but it is also completely non-intuitive when you look at non-anecdotal evidence. For example:
- The change in real GDP in Q4 2008 was -8.9% whereas in Q3 2011, GDP changed by +1.8%
- Retail sales changed at an annual rate of more than -10% in Q4 2008 compared to +6 to 8% in Q3 2011
- Industrial production and capacity utilization were much lower in Q4 2008 compared to Q3 2011
- The economy was losing jobs at the average rate of ~600,000 jobs/month in Q4 2008 as opposed to gaining on average ~150,000 jobs a month in Q3 2011
So, what exactly is the Thomson Reuters/University of Michigan Consumer Sentiment measuring?
2) Second, SL adds:
What drove the sentiment index to levels comparable to 2008? The index actually has two components: the Current Conditions Index and the Consumer Expectations Index. And it was the "expectations" component that pushed the whole index to this low point. In fact according to U Michigan, when it came to consumer expectations, the "end of the world" was coming in August of 2011 - a point on the index that was in fact lower than the expectations measure in 2008 (as shown in the chart below). This is puzzling. Were consumers reacting to all the market driven media frenzy in August that wasn't as prevalent in 2008? Were consumers not as focused on the state of the financial markets in the past as they are now?
On the other hand the "current conditions" component did not dive anywhere close to its 08 lows, which is more in line with other economic indicators.
So, basically, according to this measure of consumer sentiment, in August 2011 the Consumer Expectations index fell lower than the lowest value in 2008! Yet, all the above indicators measuring the real health of the economy (see above) were much worse in Q4 2008 than in Q3 2011 and Q4 2011. How is it that, not just the overall consumer sentiment index, but also its consumer expectations component, seems so out of whack with macroeconomic conditions (current and immediate future)?
3) Third, SL discusses another indicator on consumer confidence: