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Yahoo U: What is consumer sentiment?

Yahoo Finance's Brian Cheung explains consumer sentiment and how it's measured in this week's Yahoo U.

Video Transcript

BRIAN CHEUNG: Well, we've been talking a lot about consumer sentiment this morning. And on the surface, it sounds a little silly, right? Asking a bunch of people, how do you feel, and then turning it into some number that makes stocks move. So in today's Yahoo U, we're going to discuss what consumer confidence measures are and why it matters. And the University of Michigan, which puts the survey together, it's been doing it since 1946.

And they'll ask about 50 questions broadly covering personal finances, business, and buying conditions, questions like, would you say that you and your family who are living there are better off or worse off financially than you were a year ago? Or would you say that at the present time, business conditions are better or worse than they were a year ago? Or lastly, during the next 12 months, do you think that prices in general will go up or go down or stay where they are?

And the options to answer these are generally better, same, worse off, or don't know. And the vibe check so far has been not that great. So the chart that we're looking at here includes the updated numbers that we got this morning, which includes that 55.1 number in the month of August. Now again that's a very small tick up, and that shows improvements from the all-time lows this summer. But it's still, as you can see, historically very low.

So naturally, the question is, well, if people have low confidence based off of those questions I just showed you, does this lead to a pullback in spending, for example? What's the tangible impact on the economy? Well, IMG Economics has pointed out that consumer sentiment doesn't actually tend to correspond to spending data. And others have actually broadly noted that the University of Michigan survey sample size is actually about 600 people. Compare that to the monthly jobs report, for example, which interviews about 60,000.

So might be a small sample size, but what the University of Michigan survey does help us get an interesting pulse on is future inflation. So if you remember that question I just showed you about expected prices a year from now, well, the University of Michigan uses responses to show inflation expectations, which have been certainly going up. And in August, Americans expect prices to rise about 5% over the next year.

Now, that's very high, but maybe that actually shows some signs of plateauing here. And this is important because expectations for higher inflation in the future could spur panic buying now to get ahead of higher prices, which could actually have the effect of creating even higher inflation now. So I guess the good news here is that if inflation expectations are plateauing, maybe they're not running away.

But the bad news is that inflation, of course, overall is still very high. And by the way, the last point I'll make here, the data that you're looking at here goes back to 2012, which is a time during which Michigan football has had no national titles. So just a quick reminder there. But that's it for this week's Yahoo U.