CHART: What Consumer Sentiment Numbers Don't Tell You

Consumer sentiment has fallen from a six-year high, but how much does it matter?

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Consumers tempered their optimism last month, causing one popular consumer sentiment measure to fall off its recent highs. The latest reading of the Thomson Reuters/University of Michigan consumer sentiment index fell from June's 85.1 to 80.0 in July. That's the index's lowest level since April and comes down from June's six-year high.

As far as consumer sentiment goes, 5.1 points is a big decline, but the size of that drop also may not really mean that much.

[READ: Consumer Sentiment Hits 6-Year High in July]

"It's a big hit, but when you think about the economy, is it really that different from last month?" says Ozlem Yaylaci, senior U.S. economist at IHS Global Insight. "I don't think so."

The latest report shows how tricky it can be to divine the state of the economy from consumer sentiment numbers. Since the index measures consumers' feelings, and since feelings are subject to all sorts of forces, the index is volatile. In 2011, for example, the congressional gridlock over spending and the debt ceiling helped to drive consumer sentiment from the mid-70s to below 60.

In addition, the numbers that measure consumer sentiment are unlike other indicators. Seven-percent unemployment reflects that seven percent of the labor force is looking for work, no matter how the rest of the economy looks. However, a consumer sentiment reading of 80 means something very different in any given context. Right now, the unemployment rate is 7.4 percent and slowly falling. When consumer sentiment was around 80 in 2007, the jobless rate was at 4.7 percent and about to skyrocket.

(University of Michigan/Federal Reserve Bank of St. Louis)

Indeed, while trends in jobless rates and consumer sentiment have some inverse correlation – sentiment naturally drops when people don't have jobs – the numbers don't nearly shift in lockstep with one another. The same goes for other indicators like consumer spending or wages – some relationship, but nothing that tracks very closely to consumer sentiment.

The fact that the index measures consumers' perceptions of the economy accounts for why the index can be so jumpy. Even while unemployment has remained elevated, sentiment has improved because Americans sense things are better than they were. Since people's economic perceptions are constantly recalibrated, that means that, while the economy has not shifted much since June, consumers felt little change in their circumstances and are uncertain about what the future will bring.

"Time is passing, and nothing is changing that much. So I think that's the problem here," says Yaylaci.

[ALSO: The Dark Side of Improved Consumer Confidence]

Of course, consumer sentiment readings are still useful. One is that they show whether Americans are only currently unhappy or if they are also despondent about the future. In July's reading, Americans' view of current economic conditions fell, and they also foresaw a slower pace of growth. That can provide some insight into whether Americans are feeling ready to spend more money, whether at the store or on a home.

And the combination of those two numbers can provide a snapshot of where Americans feel the economy is going, regardless of the latest fluctuations in other indicators.

"Rather than concentrating on these five points, we should look at the direction, and the direction is on the negative side. So people are losing their optimism," says Yaylaci.

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