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Economy in Brief

Mid-October Michigan Consumer Sentiment Tanks With Stock Market
by Tom Moeller October 17, 2008

We got our first glimpse of consumer's reaction to the unfolding crises in the credit markets. The University of Michigan's mid-October reading of consumer sentiment collapsed by 18.2% from the September level, to 57.5. The latest level was the lowest for the series since June which in turn was the lowest since early 1980. The drop was a record m/m decline for the index which dates back to the late 1970s. Consensus had expected a lesser decline to 65.0.

During the last ten years there has been a 47% correlation between the level of sentiment and the three-month change in real consumer spending.

The current conditions index led the collapse with 21.5% decline. The view of current personal finances gave back all of a September improvement and fell 26.7% while index of buying conditions for large household goods fell 17.8% m/m, down 38.0% y/y.

The expectations component of consumer sentiment aided the m/m decline in the total with a 15.6% drop. Expectations for business conditions during the next year collapsed by 26.2%. Expectations for conditions during the next five years fell 13.3%.The expected change in personal finances also fell 12.5%.

The mean expected rate of inflation during the next year held steady at 4.6% with lower oil prices. It was as high as 7.0% in May. The expected inflation rate during the next five years fell to 2.9%, the lowest level since 2003.

The opinion of government policy, which apparently influences economic expectations, fell sharply from September (-41.5% y/y). Only five percent of respondents thought that a good job was being done by government, the least since 5%.

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. The summary indexes are in Haver's USECON database, with details in the proprietary UMSCA database.

University of Michigan Mid-October September October y/y 2007 2006 2005
Consumer Sentiment 57.5 70.3 -28.9% 85.6 87.3 88.5
  Current Conditions 58.9 75.0 -39.7 101.2 105.1 105.9
  Expectations 56.7 67.2 -19.1 75.6 75.9 77.4
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