Sentiment and Misery (and Maybe Partisanship)

The University of Michigan’s February consumer sentiment index (preliminary) is out today. Here’s the picture (series inverted so down is improvement) and the “misery index”, the sum of unemployment and y/y CPI inflation.

Figure 1: “Misery Index” sum of unemployment and y/y CPI inflation, % (blue, left scale) and inverted University of Michigan Consumer Sentiment Index (tan, right scale). NBER defined peak-to-trough recession dates shaded gray. Source: BLS, University of Michigan, both via FRED, NBER, and author’s calculations.

The link between the Misery Index and the sentiment index (FRED series UMCSENT) is discussed in this post. What is of interest to me is the seeming break in recent months. Consider:

UMCSENT = 51.9 – 4.13MISERY 14.8pgasoline

Adj-R2 = 0.64, SER = 7.87, DW = 0.30, Nobs = 303, sample 1992M01-2023.01. Bold denotes significance at 10% msl, using HAC robust standard errors.

The beta (standardized) coefficient on MISERY is 0.60 and on the log real gasoline price is 0.344, so MISERY is most important influence on UMCSENT.

The actual, fitted, and residuals are shown below. In December 2022, the sentiment index is overpredicted by nearly 20 points.

Figure 2: Actual UMCSENT (red) fitted (green) and residuals (blue).

I have no particular explanation for why the overprediction occurs, although it is of interest that there has been an increasing partisan divergence in perceptions of economic conditions, as documented by among other Carola Binder (2023).

Source: Binder (2023).

If the Republican shift is particularly large in the Biden era, htne this could break the historical relationship between MISERY and UMCSENT.

How much of a bias is there? Curtin (2022) provides some slightly older estimates, also based on the Michigan Survey.

Curtin writes:

…the partisan gap was larger under Trump and Biden than the Index’s entire time-series variations from optimism to pessimism; Bush’s and Obama’s gaps were about half that size.

7 thoughts on “Sentiment and Misery (and Maybe Partisanship)

  1. joseph

    Besides partisanship, the other thing that skews these sentiment polls is the worthless news media.

    In some polls they ask people how they are doing personally and most say fine. But if they ask the same person how the economy is doing they say terrible. It’s the stuff in the news that makes them think the economy is terrible because all they hear is bad news.

  2. pgl

    Russia’s ‘Impossible To Destroy’ Terminator Tank Gets Bombed By Ukraine

    Ukraine’s armed forces have successfully destroyed a Russian Terminator tank that Luhank’s head described to be “almost impossible to be destroyed.”

    Now some will see this as good news for Ukrainians. But I fear Putin’s pet poodle JohnH is going to have a bad weekend living in the Kremlin not being fed by his master.

    1. Ivan

      I think this is the one that is “invincible” from the top, front and sides. So all you have to do is to hide and let it roll past you – then send your anti-tank missile into its back.

  3. pgl

    It seems Senator Rick Scott has a new scheme to rip off Social Security recipients:

    Sen. Rick Scott (R-Fla.) announced a new bill on Friday to increase funding for Social Security and Medicare and institute a higher standard for making cuts to the entitlement programs, following President Biden’s pointed accusations during his annual address before Congress on Tuesday.

    “I have been fighting since day one to protect and preserve programs like Social Security and Medicare for Florida’s seniors, and today I am proud to announce new legislation, my Protect Our Seniors Act, to safeguard the benefits of these critical entitlements,” Scott said in a press release. The legislation aims to rescind the nearly $80 billion in funding for the Internal Revenue Service that was approved in last year’s Inflation Reduction Act and redirect it towards Social Security and Medicare. The IRS funding has been a frequent target of Republicans, who have denounced it as creating an “army of 87,000 IRS agents. ”The bill would also require that any cuts to Social Security or Medicare be approved by a two-thirds vote in Congress and would block Medicare savings from being used for other spending initiatives.

    Protect Our Seniors Act? Seriously? Folks – hold tight to your wallets and let’s see the details as we know this clown’s real agenda.

    1. Ivan

      I have an amendment to Scott’s proposal. How about we take the $160 billion, that those 87,000 IRS agents will recover from tax cheats, and redirect that to Social security?

  4. Moses Herzog

    Was anyone else extremely shocked that BlueStatesResidentKopits didn’t show up in this thread to note that consumer sentiment was up 6% from a year ago?? I know Kopits puts a lot of weight into that individual stat, so it really surprised me. Maybe Kopits wanted to take issue with Joanne Hsu’s math, as he often does when it doesn’t fit the RNC’s running narrative??

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