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The Least Important Leading Indicator

1) Consumer sentiment is useless is predicting the single most important engine of economic growth

2) Since it's somewhat correlated with media coverage of the economy, attempts to jawbone up the economy are doomed to fail, or at least be irrelevant.

3) Consumer sentiment during non-recessionary periods of Republican and Democrat administrations over the last 28 years clearly shows patterns that indicate more favorable coverage during the Clinton years.


U.S. consumer confidence rebounded this month to the highest levels since the demise of Wall Street, according to a highly regarded study.

The University of Michigan's Consumer Sentiment Report, released today, is based on a scale of one to 100, and preliminary April figures show confidence rose to a level of 61.9, up from 57.3 in March. This is the highest index reached since September, when the survey recorded a 70.3.

In the study, people said they're feeling better about spending money because they think the recession is going to bottom out this year, not because their personal economic situation has improved.

And why would they think that? Well, why do you think?

Most consumers really only know about their own situation at the moment.  They're going to form their opinions about the broader economy based on 1) what they're hearing in the press and 2) what they're hearing from their friends, co-workers, and businesses.  And as much as we don't like to admit it, voices of authority such as the President and the Fed Chairman still carry weight, especially when reduced to optimistic sound bites.

Worse, this statistic has just about no predictive value.  I correlated the St. Louis Fed's record of Consumer Sentiment with the change in personal spending, month-over-month, for the last 30 years.  I lagged them from 0-12 months.  The best correlation was lagged by one month, meaning that consumer sentiment best predicted next month's increase in spending.  It correlated at 0.22, which is pretty meaningless, and has an r-squared of 5%, meaning that the best, the best that this does is to predict 5% of next month's increase in personal spending.

OK, I hear you say, but both numbers are sort of bounded.  After a while, you can be making more than you're spending, top out your spending, still be feeling really good about the economy, but not feeling better, and not spending more.  Aha!  The month-to-month change in sentiment predicts less than 1% of the change in personal spending for any month in the coming year.

This means that 1) consumer sentiment is useless is predicting the single most important engine of economic growth, and 2) since it's somewhat correlated with media coverage of the economy, attempts to jawbone up the economy are doomed to fail, or at least be irrelevant.

But when you look at the graph of consumer sentiment, and compare it with GDP growth, something else emerges:

Sentiment recovers during the first years of the Reagan Administration and then stays high, but flat until the recession of 1990-91.  It then recovers as the economy begins to, only to dip again just in time for the election.  At which time it goes on an 8-year, unbroken upward trend, cresting and then declining with the election of George W. Bush.  The attacks of 9/11 no doubt helped push it down, but in fact, we were headed into a recession at that point, anyway.  Then, despite the recovering a prosperous economy until 2007, sentiment bounces around, but trends flat for the decade.

There's never any one, single cause for anything outside of physics, but there's pretty strong evidence here that unremittingly positive coverage during the 90s pushed up sentiment, while unremittingly skeptical coverage during the Bush years helped keep it in check.

The good news is that this probably didn't actually affect the real economy.  The bad news is that it almost certainly affected out politics.

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