Consumer Sentiment Index
The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan. The level of confidence that consumers have about the stability and future prospects of their incomes can be used to understand the overall trends of the economy. If the Consumer Sentiment is low, consumers will spend less money and will save more, which will shrink the economy. In the case of high Consumer Sentiment, the consumer will tend to spend more that will help the economy to expand.
Almost 66% of the US GDP is made of consumer spending, and rest is the Business and Government Spending. The data of UMCSI can be found at the given link:
The University of Michigan releases the initial report on the second Friday of each month. The final report is published on the fourth Friday of each month at 10:00 a.m. EST.
Make-Up of UMCSI
UMCSI is the most important consumer survey in the US. The research center at the university conducts a telephone survey asking 500 consumers a series of questions about their personal finances and their opinions on the business conditions. In the University of Michigan Consumer Sentiment Index, the Expectations Index has 50% weight, and the Current Conditions Index also has the 50% weight.
How to Use UMCSI
Unlike the ISM Manufacturing Index and NMI, UMCSI does not have a definite level that signifies expansion or contraction in the US Economy. However, we can get a simple trend line average of the UMCSI and correlates this with long term US GDP growth.
The long term average of the UMCSI (85), coincides with approximately 3% long term GDP growth. So if the multiple readings are above 80, the consumers are very bullish, and the expected growth is higher than 2%. For the readings between 70 & 80, the expected growth is between 0% to 2% with Benign consumers. If the readings are between 55 and 70, with very bearish consumers, the expected growth is -3% to -0%.
Policymakers are likely to take opposite action to slow down an overheated economy and speed up the sluggish economy. So the way to think of this is pretty straightforward. The closer we get to extreme Bearishness on behalf of the consumers, the higher the likelihood of a loosening monetary policy response.