Hulbert: the chances of recession are increasing; What are consumers worried about?

Is the American consumer optimistic or not?

This is a critical question, as consumer demand is one of the pillars of the US economy. Still, to say we’re getting mixed messages would be an understatement. The two most important measures of consumer attitudes currently tell radically different stories.

On the one hand, the Conference Board’s Consumer Confidence Index (CCI) suggests that consumers remain relatively optimistic.

For January, according to data released earlier this week, the CCI slipped only slightly from its December level, despite heightened concerns about inflation and the Omicron variant. It currently sits at the 77th percentile of all monthly readings since 1979, more than 77% of all months for the past 43 years.

On the other hand, the University of Michigan Consumer Mood Gauge (UMICH) suggests that consumers are on the whole considerably pessimistic. The latest level of the University of Michigan index is only at the 12th percentile of the distribution of monthly readings since 1979.

In the past 43 years, there has only been one other occasion when the gap between them was as wide as in January. And that was in December, just a month ago.

What is the source of this great divergence? According to James Stack, editor of InvestTech Research newsletter, it reflects subtle differences in what the two surveys measure. The CCI gives more weight to consumer attitudes towards the overall economy, while the UMICH survey gives more weight to consumer attitudes towards their immediate personal situation. So when the CCI is much higher, as it is now, it means that consumers are more optimistic about the economy in general than about their personal situation.

(Disclosure note: Stack’s newsletter is not one of those that pays a flat fee to my auditing firm to calculate its track record.)

This great divergence has more than a passing significance.

According to Stack, and confirmed by my analysis of data since 1979, the chances of an economic recession are high when, like today, the CCI is significantly above the UMICH measure.

To show this, I measured the correlation between the CCI-UMICH divergence on the one hand and, on the other hand, the probability of the onset of a recession in the following 12 months.

To calculate these recession probabilities, I relied on the business cycle calendar maintained by the National Bureau of Economic Research (NBER), the semi-official arbiter of the start and end of US recessions.

The table below reports what I found, based on monthly data since 1979. The differences reported in the table are significant at the 95% confidence level that statisticians often use to determine if a model is genuine.

Relationship between UMICH and CCI consumer sentiment measures % of months since 1979 when this condition persisted Probability of an NBER recession starting in the next 12 months

When UMICH is greater than CCI



When the CCI is 0 to 17 percentage points higher than the UMICH



When the CCI is more than 17 percentage points higher than the UMICH



To put the data in the table into context, note that the CCI is currently 45 percentage points higher than the UMICH measure. We are therefore well within the range indicated by the bottom line of the table.

However, note carefully that while the odds of a recession beginning within the next 12 months are high, they are still modest – about one in five. So, even if the future looks like the past, there is no guarantee that a recession will begin. Nevertheless, the increase in the probability of a recession is worrying.

About Joel Simmons

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