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Consumer Sentiment vs. Gasoline Prices

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As far as recessions go, consumer confidence sure doesn't seem to be leading.

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One of the bullish arguments that I have repeatedly heard during the latest pullback is I am wrong based on consumer sentiment. Indeed, Reuters is reporting July consumer confidence at a six-year high.

Consumer confidence rose to a nearly six-year high in July as consumers perceived improvements in business conditions and the labor market, a report said on Tuesday. The Conference Board said its index of consumer sentiment rose to 112.6 in July, the highest reading since August 2001 and above an upwardly revised 105.3 in June.

"An improvement in business conditions and the job market has lifted consumers' spirits in July," said Lynn Franco, director of The Conference Board Consumer Research Center, in a press release. The reading was well above expectations. The median forecast of economists polled by Reuters was for 105.0, up from an originally reported 103.9 in June.

Wow. That's stunning, is it not? Wait a second. I think I mean "perplexing". I do not know the exact nature of the survey but whatever it is, I think it is seriously flawed.

I can hear the chimes now: "Of course you think it's flawed: you're a bear."

My response to that is, "I think it's flawed because it is flawed, and I will offer proof. I have no legal background but in case I am wrong about it being flawed I offer this second opinion: Even if it's not flawed, the consumer confidence survey is useless."

Of course, inquiring minds want to see that proof of that last statement. Let's tackle the useless part first. In Leading Economic Indicators I discussed the stock market, consumer sentiment, housing permits, money supply and the yield curve. It is surprising how few of those "leading indicators" actually lead. The post was made back in January, so apologies offered for the fact that the following chart is not current but I think the idea is still valid.


Click here to enlarge.

As far as recessions go, consumer confidence sure doesn't seem to be leading. More to the point, look at the chart and see countless dips below 0% with the stock market rising in most of them.

Inquiring minds no doubt are not convinced on such flimsy evidence (and who can blame them) so I propose we take a look at gasoline prices.


Gasoline Prices

I was thinking about the recent rise in consumer sentiment and asked myself, "How can this be? What has changed? Is the economy really getting better? " Then it occurred to me that gasoline prices have been falling. That is odd given that crude prices have been rising and are near all time highs. Nonetheless, consumers do not care about crude prices.

They do, however, care about gasoline prices. And gasoline prices here have recently fallen over $.45 (or more) even as crude prices are hitting all time highs.

Acting on a hunch I phoned "Bart" at NowAndFutures on Thursday and asked him to put together a chart of consumer sentiment versus gasoline prices for me. Bart was happy to oblige. (Thanks, Bart!)

Wholesale Gasoline Prices vs. Consumer Sentiment

Click here to enlarge.

My notes: In the above chart, gasoline prices are declining in scale. The previous reference to a 6-year consumer confidence high is based on the Conference Board Consumer Research Center, not the University of Michigan consumer sentiment index (we used the UOM survey simply because it was the data we had).

I expected an inverse correlation lately between the UOM sentiment index and gasoline prices but I sure did not expect a near perfect inverse correlation. I asked Bart to go back as far as he could to see if the correlation held. Bart took it back to 1995. From 1995 to 1999 there simply was no correlation. Could it be because gasoline prices were range-bound between $.93 and $1.30 for those 5 years and now we have seen prices soar above $3.50?

Inquiring minds are no doubt asking "What happened? ". The above chart should make it clear: As gasoline prices rose above $2.00 (roughly January 2004), consumer sentiment based on the University of Michigan Survey has been perfectly inverse correlated to gasoline prices.

Many inquiring minds are still not convinced. They are saying "Mish, is that all you've got?" Actually, I do have more. Please consider a recent NBC poll of consumer sentiment: America's Economic Mood: Gloomy.

Americans are feeling decidedly sour about the economy and those in charge of it.
More than two-thirds of Americans believe the U.S. economy is either in recession now or will be in the next year, a new Wall Street Journal/NBC News poll shows. That assessment comes despite the fact the economy has experienced sustained growth with low inflation and unemployment and generally rising stock values ever since the recession that ended early in President Bush's tenure.

In addition, the poll shows a lack of confidence in economic leaders. That includes not just Mr. Bush and Congress, both of whom have the approval of fewer than one-third of all Americans, but the financial industry, large corporations in general and energy, drug and insurance companies in particular.

For more on the NBC News Poll see point #2 of Glass Half Empty? in Prof. Kevin Depew's daily dose of "Five Things".

So there you have it:

  • The Consumer Confidence Board consumer sentiment index is at a six-year high.
  • The University of Michigan index is nowhere near a six year high but is perfectly inverse correlated to gasoline prices ever since gasoline prices rose above $2.00 (January 2004).
  • The NBC news poll shows more than two-thirds of Americans believe the U.S. economy is either in recession now or will be in the next year.

If I took a poll, which, if any, of the above polls makes any sense to you?

No positions in stocks mentioned.
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