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Consumer sentiment in Montana.

Analysis of population, income, and employment provides a good overview of statewide and local economies. But these data provide very little information about consumers. Nationally, consumer spending accounts for almost two-thirds of the Gross National Product (GNP). Here in Montana, a large segment of the business community deals directly with consumers -- whether it be retail trade, services, or financial institutions.

Twice each year, the Bureau of Business and Economic Research calculates Montana's Index of Consumer Sentiment. This Index is based on a statewide telephone survey of a cross section of adults. It is conducted in conjunction with the Montana Poll, which is jointly sponsored by the Bureau and the Great Falls Tribune.

Montana's Consumer Sentiment Index is patterned after one developed by the University of Michigan. Both are computed from consumer responses to a series of questions. We asked Montana consumers:

* How their own household did financially in the past year;

* If they expect their household economic situation to improve or deteriorate in the next twelve months;

* How they expect the state's economy to do in the next twelve months and the next five years; and

* If they think the next six months would be a good time to buy major retail items such as furniture and appliances.

Index Predicts Turning Points

Nationwide, the Index of Consumer Sentiment has been recognized as a reliable predictor of turning points in the business cycle. Figure 1 shows the U.S. Index from 1978 through 1990. Note downturns in the Index immediately preceding both the 1980 and 1981 recessions. Similarly, upturns in the Index anticipate economic recoveries.

Now look at last year's precipitous decline in the national Index. By the end of 1990, consumer sentiment was about 12 percentage points below its value at midyear. As previously noted, this drop was one indicator of a recession in the U.S. economy.

The Index of Consumer Sentiment is a good indicator of changes in national economic trends. But it does not necessarily signal the magnitude of change. Look back at the early 1980s. Here the Index dropped by almost 25 percent. Yet consumer spending and other economic indicators did not decrease by anywhere near that amount.

The 12 percentage point decline in 1990 represents a drop of almost 15 percent, and the Index may continue downward. But consumer spending is not projected to decrease by anywhere near this amount. In short, when looking at the Index of Consumer Sentiment, we should concentrate on the direction of the changes, rather than their magnitude.

Montana's Index

We compute Montana's Index twice early (approximately each June and December) and have done so since 1982. The national index is computed every month. The Montana data, therefore, is not quite as precise as national figures. Nor do we have data for the downturn phase of the last business cycle.

As shown in figure 1, the Montana Index of Consumer Sentiment declined from 107.4 in June 1990 to 91.5 in December 1990, a decrease of 15 percentage points. This provides one more indicator that Montana's economy is now feeling the national recession's impact, and at about the same time as the rest of the country.

Broad trends in the Montana economy during the 1980s are mirrored in the Index for Consumer Sentiment. Earlier we talked about the recovery in 1983 and 1984, the downward slide in 1985 and 1986, and finally the "fragile" recovery beginning about 1987. These trends are all present in the Index. Remember that we are looking at changes in the Index, not necessarily their magnitude.

Regional Indexes

We've also calculated an Index of Consumer Sentiment for each of the three multicounty regions mentioned earlier. Since they are based on fewer responses than statewide figures, the regional indexes should be interpreted with more caution.

The statewide decline which began in late 1990 also appears in each of the three regions. The Southeast (Billings trade area) experienced a slight uptick from late 1989 to the middle of 1990; then the Index turned downward. In the other two regions, consumer sentiment was roughly stable during the first half of 1990 and then declined during the last half of the year.

What can we conclude? First, recent declines in the U.S. Index provide one more piece of evidence that the country is in a recession. Second, Montana's Index also declined, confirming that we will not escape cyclic impacts; the fact that it turned downward the same time as the U.S. Index verifies that Montana feels the impact of recession at the same time as the nation. And finally, consumer sentiment declined all over Montana -- even in portions of the state not severely impacted by past recessions. In other words, retailers and other business people in the Southeast and Northeast will not escape impacts of this recession.

We can gain a little insight into consumer behavior by looking at just why the sentiment Index declined. Remember that the Index is computed from a number of questions. We asked consumers how they personally were doing and how well they expected to do in the future. Then we asked them how they thought how the state's economy was doing. Response patterns were consistent; in all cases people thought the state's economy was doing worse, while their own economic situation remained stable. Consumers think they will weather the storm relatively well, but that everyone else will feel the impacts of the recession.

Our next Montana Poll is scheduled for May 1991. We should find out then if the Montana Consumer Sentiment Index does, in fact, reflect the recovery predicted for that time.

Paul E. Polzin is director of the Bureau of Business and Economic Research and professor of management, School of Business Administration, The University of Montana.
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Author:Polzin, Paul E.
Publication:Montana Business Quarterly
Date:Mar 22, 1991
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