What it means
Consumer spending drives a large share of activity in many economies, and spending depends partly on how people feel. The Michigan index, compiled by the University of Michigan from a survey of households, tries to capture that mood.
It asks about personal finances now and in the future, about business conditions over the short and long term, and about whether it is a good time to buy big-ticket items. Each question is turned into a relative score by subtracting the share of unfavourable answers from the share of favourable answers and adding 100.
The scores are combined and scaled against a base period, the first quarter of 1966, which is set at 100. A reading above that level means sentiment is more upbeat than in the base period, and a reading below it means it is more downbeat.
A preliminary figure is released partway through each month, followed by a final figure at the end of the month. The two can differ slightly because more responses arrive, and markets sometimes react to the gap.
Separate sub-indices cover current conditions and expectations, and a fall in expectations is often seen as an early warning. For a business manager, the index is a useful backdrop for planning.
A retailer might set stock levels more cautiously when sentiment is sliding, and a car dealer may watch the buying-conditions question closely. Sentiment is not the same as spending, however, since people sometimes say they are worried and keep spending anyway.
Be careful with the abbreviation. The letters MCSI can also be used by other organisations for different measures, so always check the source.
Other countries run their own consumer confidence surveys with different questions and base years, which means their numbers cannot be compared directly. Economists treat the index as one input among many.
They compare it with hard data such as retail sales, employment and income, because surveys capture opinion and not behaviour. When the survey and the hard data disagree, the hard data usually win.
In practice
Real-world examples.
Example
A retail chain sees the sentiment index fall for three months in a row. The finance director trims the order for discretionary goods such as televisions by 10% and keeps staples unchanged. The cut protects cash if shoppers become more careful.
Example
A bond trader reads the preliminary release and sees that expectations have dropped sharply while current conditions are steady. She treats it as a sign that growth may slow and that interest rate cuts could become more likely. She adjusts her positions modestly and waits for the final figure.
Example
A homebuilder tracks the buying-conditions question for houses. When the share of people calling it a good time to buy rises, the company brings forward a new phase of a development. The extra sales help it hit its quarterly target.
Formula
Calculation
Relative score = % favourable answers - % unfavourable answers + 100
Simplified average = Sum of the five relative scores / 5
The published index scales the combined scores so that the base period equals 100. As a simplified illustration, suppose the five questions give these results. Question 1 has 45% favourable and 35% unfavourable, a score of 110. Question 2 has 30% and 40%, a score of 90. Question 3 has 35% and 40%, a score of 95. Question 4 has 40% and 30%, a score of 110. Question 5 has 28% and 38%, a score of 90. The sum is 110 + 90 + 95 + 110 + 90 = 495, and the average is 495 / 5 = 99, slightly below the base level of 100.Case study
Seen in the real world.
Lakeshore Appliances is an illustrative, fictional manufacturer of kitchen equipment. Its planners noticed that the sentiment index had slid from 104 to 92 over four months, even though retail sales were still growing.
The finance team ran a scenario in which demand for premium products fell by 8% over the next two quarters. On annual premium sales of $25,000,000, that meant a possible shortfall of 0.08 x 25,000,000 = $2,000,000, and the team reduced its production plan to match.
Sales did soften in the following quarters, although by less than feared, and the company avoided building up unsold stock. The illustrative lesson is that sentiment is an early signal that deserves a scenario, not a certainty that justifies drastic action.
Watch out
Common mistakes.
- Treating the index as a measure of actual spending, when it records opinions that may or may not turn into purchases.
- Reacting to a single month's change, when the preliminary and final figures can differ and the series is noisy.
- Assuming MCSI always refers to the Michigan survey, when the same letters can mean other measures in other organisations.
Questions
People also ask.
Who publishes the Michigan Consumer Sentiment Index?
It is compiled by the University of Michigan's Surveys of Consumers and released monthly, with a preliminary and a final reading.
What does a reading of 100 mean?
It means sentiment equals the level in the base period, the first quarter of 1966, so it is a reference point and not a neutral line.
How is it different from consumer confidence from other bodies?
Different surveys ask different questions, use different samples and have different base years, so the readings cannot be compared directly.
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