The data on the U.S. unemployment rate have been getting progressively better over recent months, either because of or in spite of the government’s efforts, depending on one’s viewpoint. And if this week’s chart is to be believed, then the data should continue to get better over the next several months.
What the chart shows is that the data from the University of Michigan’s Consumer Sentiment Survey acts as a leading indicator for the unemployment rate. I am using a 10-month offset in this case, shifting the sentiment data forward by 10 months to reveal how the unemployment data tend to follow in the same footsteps. One could make the case that 10 months is perhaps not the perfect time offset; maybe it is 6 months, or maybe a year. But the point remains that the University of Michigan survey data do seem to lead by some amount of time.
[Read: Favorable Sentiment for a 4th Quarter Rally]
Back in 2009, the Fed had the fire-hose wide open, and yet the jobs market did not seem to respond. The unemployment rate finally peaked at 10.0% in October 2009, several months after the stock market’s bottom, and also several months after the Fed started “helping”. What had not happened yet in early 2009 was the passage of enough time following the recovery in consumer sentiment. The University of Michigan survey had bottomed out at a reading of 56.3 back in February 2009. So some number of months needed to have gone by before the unemployment rate could respond.
Now we have a different situation. The latest reading for this survey data was 89.4, the highest since the summer of 2007. It continues to trend higher, which means that the unemployment rate should continue to trend lower (remember it is inverted in the chart).
At some point, consumer sentiment will reach its peak for this cycle. When that happens is an unknown. I don’t have a good leading indicator for that question. When consumer sentiment reaches its peak, then some number of months later we can expect a reversal for the unemployment rate. The point for now, though, is that consumer sentiment says the unemployment rate should continue dropping for at least another 10 months or so.
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