The College of Michigan’s February client sentiment index (preliminary) is out right now. Right here’s the image (sequence inverted so down is enchancment) and the “distress index”, the sum of unemployment and y/y CPI inflation.

Determine 1: “Distress Index” sum of unemployment and y/y CPI inflation, % (blue, left scale) and inverted College of Michigan Shopper Sentiment Index (tan, proper scale). NBER outlined peak-to-trough recession dates shaded grey. Supply: BLS, College of Michigan, each through FRED, NBER, and writer’s calculations.

The hyperlink between the Distress Index and the sentiment index (FRED sequence UMCSENT) is mentioned on this publish. What’s of curiosity to me is the seeming break in latest months. Contemplate:

UMCSENT = 51.9 – 4.13MISERY – 14.8p^gasoline

Adj-R² = 0.64, SER = 7.87, DW = 0.30, Nobs = 303, pattern 1992M01-2023.01. Daring denotes significance at 10% msl, utilizing HAC strong customary errors.

The beta (standardized) coefficient on MISERY is 0.60 and on the log actual gasoline value is 0.344, so MISERY is most vital affect on UMCSENT.

The precise, fitted, and residuals are proven beneath. In December 2022, the sentiment index is overpredicted by almost 20 factors.

Determine 2: Precise UMCSENT (pink) fitted (inexperienced) and residuals (blue).

I’ve no explicit clarification for why the overprediction happens, though it’s of curiosity that there was an growing partisan divergence in perceptions of financial situations, as documented by amongst different Carola Binder (2023).

Supply: Binder (2023).

If the Republican shift is especially giant within the Biden period, htne this might break the historic relationship between MISERY and UMCSENT.

How a lot of a bias is there? Curtin (2022) gives some barely older estimates, additionally primarily based on the Michigan Survey.

Curtin writes:

…the partisan hole was bigger underneath Trump and Biden than the Index’s complete time-series variations from optimism to pessimism; Bush’s and Obama’s gaps have been about half that measurement.