In the past few years, a persistently low level of consumer sentiment, as measured by the University of Michigan, Conference Board, or Gallup surveys, relative to conventional economic measures has puzzled analysts, including this one [1] [2] [3] [4] [5]. This puzzle is illustrated by the evolution of the U. Michigan series (FRED series UMCSENT), and the fitted values using 2011M01-2024M08 data on unemployment and year-on-year inflation.

Figure 1: University of Michigan Consumer Sentiment index (bold black), fitted values using unemployment and inflation (see text) (tan), +/- 1 standard error band (gray line). NBER defined peak-to-trough recession dates shaded gray. Source: University of Michigan via FRED, NBER, and author’s calculations.

Here’s the regression results (where inflation is 12 month growth rate, in %):

UMCSENT = 104.12 –2.455 UNRATE – 3.727 INFL

Adj-R2 = 0.51, SER 9.256, DW = 0.23, N=164, Sample 2011M01-2024M08. Bold denotes significance at 10% level using

Keep reading this article on Econbrowser Blog - James Hamilton & Menzie Chinn.