Since the early 1950s, the University of Michigan has been conducting a regular survey of consumers to gauge their attitude and outlook on the economy and their financial situation. The results provide a quantifiable glimpse into consumer strength or weakness at a given point in time.
Here is what that sentiment has looked like over the last seven decades:
What I love about this metric is the intersection between psychology and economics. There is a huge behavioral aspect to the economy, especially when economic activity is largely driven by consumption. And, I think a relationship between cycles in the economy and consumer sentiment is fairly easy to see in the chart.
While I’m not going to claim a direct causal relationship in that bad sentiment causes recessions or that recessions cause bad sentiment, it seems fair to say there is likely some feedback loop between the two. Doesn’t it seem plausible that if people are fearful of potential tough times or losing a job and spend less, that fear could manifest into an actual recession through a significant decrease in consumption?
They say attitude is everything. If it’s so important then it’s important to measure. And if we can measure it then it is definitely a metric worth watching!