Sentiment and Distress (and Perhaps Partisanship)

The College of Michigan’s February shopper sentiment index (preliminary) is out at present. Right here’s the image (sequence inverted so down is enchancment) and the “distress index”, the sum of unemployment and y/y CPI inflation.

Determine 1: “Distress Index” sum of unemployment and y/y CPI inflation, % (blue, left scale) and inverted College of Michigan Shopper Sentiment Index (tan, proper scale). NBER outlined peak-to-trough recession dates shaded grey. Supply: BLS, College of Michigan, each by way of FRED, NBER, and writer’s calculations.

The hyperlink between the Distress Index and the sentiment index (FRED sequence UMCSENT) is mentioned on this publish. What’s of curiosity to me is the seeming break in current months. Think about:

UMCSENT = 51.9 – 4.13MISERY – 14.8p^gasoline

Adj-R² = 0.64, SER = 7.87, DW = 0.30, Nobs = 303, pattern 1992M01-2023.01. Daring denotes significance at 10% msl, utilizing HAC strong normal errors.

The beta (standardized) coefficient on MISERY is 0.60 and on the log actual gasoline value is 0.344, so MISERY is most essential affect on UMCSENT.

The precise, fitted, and residuals are proven beneath. In December 2022, the sentiment index is overpredicted by almost 20 factors.

Determine 2: Precise UMCSENT (purple) fitted (inexperienced) and residuals (blue).

I’ve no explicit rationalization for why the overprediction happens, though it’s of curiosity that there was an growing partisan divergence in perceptions of financial situations, as documented by amongst different Carola Binder (2023).

Supply: Binder (2023).

If the Republican shift is especially giant within the Biden period, htne this might break the historic relationship between MISERY and UMCSENT.

How a lot of a bias is there? Curtin (2022) gives some barely older estimates, additionally based mostly on the Michigan Survey.

Curtin writes:

…the partisan hole was bigger beneath Trump and Biden than the Index’s complete time-series variations from optimism to pessimism; Bush’s and Obama’s gaps had been about half that dimension.