Consumer Sentiment Still Forecasts Employment Growth
My thanks to a subscriber who had permission to forward this interesting analysis to me, and also to Tom McClellan who said I could post it and “mention that readers can sign up to receive such articles each week, with no strings attached, no risk of being spammed, and mo sharing of their email address information.” That is good enough for me, and here is the opening:
The unemployment rate has not finished falling. That is the message from the data provided by the University of Michigan’s Survey of Consumers.
In this week’s chart, I am comparing an inverted plot of the US civilian unemployment rate to the UMich sentiment data. It makes complete sense that how consumers are feeling should have a strong positive correlation to the unemployment rate. In a recession, when more Americans are out of work, it would be natural for consumers to be bummed out. So to find a relationship between them is not much of a surprise.
But there is nevertheless a surprise in this relationship, which is that the consumer sentiment data lead the movements of the unemployment rate. In order to get the two plots on the chart to line up with each other, I had to shift forward the UMich sentiment data by 10 months. That is another way of saying that the unemployment rate numbers follow in the footsteps of the sentiment data.
Saying it more plainly, consumers don’t respond to the unemployment rate when forming their opinions about the economy. It is the other way around. The economy only does well (and creates more jobs) after consumers have seen a turn in their attitudes.
I thought this graphic was informative.
More importantly, it is another indicator which suggests that Wall Street can continue to edge higher, even though genuine earnings growth (minus the earnings boost of share buybacks) has declined.
We will need to see a resumption of somewhat stronger earnings growth, over the lengthy medium term, to underpin the US stock market. Fortunately, interest rates remain low although they are likely to edge higher from here. Also, the global economy is probably firming with the help of considerably lower energy prices than we were seeing up until a year ago. Additionally, Mario Draghi’s QE programme is helping the troubled European Union region to generate a little more GDP growth.
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