U of Michigan Consumer Sentiment Sinks

The University of Michigan Consumer Sentiment Index plunged from 70.6 in October to a preliminary reading of 66.0 in November. The consensus expected consumer sentiment to have increased to 71.0.

Details of the sentiment number don't look promising. The current economic conditions index fell from 73.7 to 69.6. The economic outlook index declined from 68.6 to 63.7.

The drop in sentiment shouldn't have been too unexpected. Sentiment is highly correlated with media reports, gasoline prices, and unemployment.

The shock to consumers that the unemployment rate broke above the 10.0% threshold for the first time since the early 1980s clearly had a much more profound effect on consumer psyche than the positive news reports about the third quarter GDP numbers.

While most economists understood the unemployment rate was going to pass through 10% for months now, the sentiment numbers indicate that the consumer had not fully understood or chose not to believe that a 10% reading was coming.

Unemployment is expected to slowly creep up over the next few months as the economy goes through a jobless recovery. However, a future increase in the unemployment rate does not guarantee a further decline in the sentiment reading as long as consumers believe the employment situation is getting better. Initial claims reports have trended down over the past two weeks and a further drift over the month may help mitigate the unemployment shock and push up the final November sentiment reading.

Please note, even though the sentiment indicator unexpectedly plummeted, a drop in sentiment does not necessarily translate into lower consumer spending. The main drivers for consumption are current/expected income and available credit. The consumer still faces constraints in both sectors, which will make future consumption growth difficult.