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Economy in Brief

Michigan Consumer Sentiment Collapsed With The Stock Market & The Opinion of Gov't
by Tom Moeller October 31 2008

The University of Michigan's October reading of consumer sentiment collapsed by 18.1% from the September level, to 57.6. That was very much the same as reported at mid-month and 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. The full-month figure matched Consensus expectations.

During the last ten years there has been a 55% correlation between the level of sentiment and the three-month change in real consumer spending.

The opinion of government policy, which apparently influences economic expectations, fell sharply from September (-39.0% y/y) but it was slightly better than the mid-month read. Only five percent of respondents thought that a good job was being done by government while 55% thought a poor job was being done. That was the highest percentage on record.

As reported at mid-month, the current conditions index led the collapse with 22.1% decline. The view of current personal finances gave back all of a September improvement with a m/m decline of one-third. The index of buying conditions for large household goods fell 16.8% m/m to the lowest level since 1980, down 37.3% 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 years collapsed by 24.6%, as reported at mid-month. Expectations for conditions during the next five years fell 14.5% but they remained well up from their historic lows.The expected change in personal finances fell 11.7%.

The mean expected rate of inflation during the next year slipped to 4.3% with lower oil prices, down from the mid-month expectation. It was as high as 7.0% in May but the expectation was still above prior years. The expected inflation rate during the next five years fell to 3.1%, the lowest level since 2003.

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.

What Is Liquidity Risk? from the Federal Reserve Bank of San Francisco and it can be found here.

Monetary Policy Transparency and Private Sector Forecasts: Evidence from Survey Data from the Federal Reserve Bank of Kansa City is available here.

University of Michigan October Mid-October September October y/y 2007 2006 2005
Consumer Sentiment 57.6 57.5 70.3 -28.8% 85.6 87.3 88.5
  Current Conditions 58.4 58.9 75.0 -40.2 101.2 105.1 105.9
  Expectations 57.0 56.7 67.2 -18.7 75.6 75.9 77.4
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