Full-Month Michigan ConsumerSentiment Reading Eases

Worries about the prospects for the economy persisted late this month, but they eased somewhat from earlier. The University of Michigan's full-month reading of July consumer sentiment came in at 66.0 versus the mid-month reading of 64.6. Despite the improvement, however, sentiment was at its lowest level since May. Consensus expectations had been for a slightly lower July reading of 65.0. During the last ten years, there has been a 72% correlation between the level of sentiment and the growth in real consumer spending during the next five months.

The expectations component of the sentiment index deteriorated the most this month, but less than the mid-month read. It posted an 8.7% m/m decline. That nevertheless left the index up sharply y/y. Expectations for personal finances fell m/m to the lowest level since March (+4.8% y/y). Expected business conditions during the next year held steady at the June level (+64.3% y/y) but expectations for conditions during the next five years fell sharply (+12.3% y/y). Inflation expectations for the next year slipped to 3.6% from 3.9% during June. That compares to a low of 1.7% last December but remained down from a reading which was as high as 7.0% during May of last year. The highest expectations were for 5.3% price inflation while the lowest were for 0.3%.

The reading of current economic conditions gave back roughly half of its improvement during June. As at mid-month, the decline was led by a reversal of the June rise in the index of current buying conditions for large household goods. The reading of current personal finances rose for the second month with higher stock market prices and reduced levels of personal debt. It has returned to the April level.

The opinion of government policy, which may eventually influence economic expectations, fell for the second month to its lowest level since February. An increased 32% of respondents thought that a poor job was being done by government while a reduced 23% thought that a good job was being done.

The University of Michigan survey data 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.

Regulatory restructuring is today's House testimony by Fed Chairman Ben S. Bernanke and it can be found here.

Macroeconomic Models for Monetary Policy: Conference Summary from the Federal Reserve Bank of San Francisco is available here.

UK forecasters were looking for Q2 GDP to be down 0.3% from Q1, so they were surprised today at the -0.8% preliminary estimate published by ONS. Press reports emphasize the magnitude of the overall decline, 5.6% year-on-year, and 5.7% from the peak in Q1 2008. The year-on-year figure is the weakest of comparable GDP performances in the 54-year history of these quarterly series, and the peak-to-latest is perhaps tied with the 1979-81 recession as the largest total contraction in any recession.

Forecasters apparently put the most store in the manufacturing sector, which is doing better. Output there is reported down just 0.3% in the quarter, a marked improvement from the 5.5% during Q1. Within the monthly data, March was actually higher by 0.2% and April held steady with that before a renewed decline in May, 0.5%, also reported this morning. But that most cyclical sector seems to be on the verge of turning around.

However, some service industries and construction remain feeble, even though they declined less that in prior recent periods. Construction had been down 5.0% and 6.9% in Q4 and Q1, respectively, so in one sense 2.2% in Q2 is "better". In an absolute sense, though, that's still quite weak. Similarly, services contracted 0.6%, somewhat less than 1.6% in Q1 and 1.0% in Q4. [All these growth rates are period-to-period, not annualized].

Within services, business services and finance apparently had the largest negative contribution, as they contracted 0.7%, with a weight of more than 30% in the total. The biggest single decline in a sector was 2.1% in transport, storage and communication, where activity fell 2.1% in Q2, but the industry group has only a 7% weight.

In such a severe recession as there's been, it might not be surprising that weakness has spilled more into services than we're used to. Further, the recession's origin in the over-extended financial sector suggests that it might well stay down longer than has been customary.

All this said, the 0.8% decrease in Q2 GDP is still much better than the prior two periods, and while the recession continues, the stabilization of manufacturing may well be a sign that recovery is developing.