Question

For this part of the project, you’ll collect data on various measure of confidence from the FRED website.

University of Michigan: Consumer Sentiment (UMCSENT), last year

S&P 500 (SP500), last year

St. Louis Fed Financial Stress Index (STLFSI), last year

1. In your own words, briefly describe what each of the three indices measure. Why are these considered an indicator of the economy’s “health”?

2. How have these indices changed over the past year? Do you think consumers and firms feel optimistic or pessimistic about the economy?

Answer 1

1.

Step 1.The University of Michigan Consumer Sentiment Index is a monthly published Index. This index is objected

• to access near time consumer attitudes on the business, climate, Personal finance and spending.
• Forecast changes in the National Economy.
• Consumer Expectations described in the form of models of spending and Savings behavior.
• Expected and Probable future spending behavior of the consumer.
• To adjudge consumers level of Optimism and Pessimism.

Step 2. Standard & Poor (500) - It is an American stock market index based on the market capitalization of 500 companies. It generally describes the Capitalization-Weighted Index. Most commonly used equity indices and considered as one of the best representation of stock market in United States. The S&P 500 quotes a Price return Index. This further divided into to more sub parts as Total return and Net Total return.

Step 3. St. Louis Fed Financial Stress Index (STLFSI) - St. Louis Fed Financial Stress Index is focused on measuring the degree of Financial stress United States is Bearing upon. Its a combination of 18 Market variables. Including Seven Interest rates, 6 yield spreads, and five other Indicators. In this Indicator the value representation is as follows -

• Zero (0) - Long Term Average of Financial Market Stress.
• Above Zero (+1) - Above Average Financial Stress.
• Below Zero (-1) - Below Average Financial Stress.

Step 4. As we all are aware an economy runs of the basis of Production and Consumption. For an economic growth there should be a balance between the Production and consumption in an economy. The Various Indicators of an economic growth are- Real GDP, Money Supply, Consumer Price Index, Producer Price Index, Consumer Confidence Index, Current Employment Statistics, Retail Trade and Services Index, Infrastructural development Index,Manufacturing and Trade Inventories and The Stock Market Indices.

The Above mentioned indices are to be properly analysed as they showcase the Financial health of an economy. The Statistical representation develops a clear view about the zones of the economy which are in good condition and where there is a possibility of improvement.

2. There are changes in the above mentioned Indices -

Step 1.The Consumer Sentiment Index has shown a decline of -4.7% Year-on-Year Basis as it was 95.7 in 2018, January and now it has changed to 91.2 in 2019, January. It also mentions decline in Current Economic Conditions as of -1.5% change on Year-on-year basis. It was 110.5 in 2018 and now it is 108.8 in 2019.

Step 2. The S&P (500) has indicated a fall of 20% in 2019 as of comparing with the previous year of 2018. S&P 500 has projected earning of $174 in 2019. Due to recession there is a fall in corporate earning of 10-20%. The expected earning is $148.

Step 3. The St. Louis Fed Financial Stress Index has shown below zero level (-0.991). This indicates That there is below average financial stress existing in the market.

Step 4. As all the indicators are showing downfall there is a sense of Pessimistic behavior in Consumers as well as Businesses. The downfall in economy creates restrictive behavior among the consumer and the Business. The consumers will try to reduce their consumption as they will focus on future dis-balance. The business will hold new investments for production. All in all the Consumer and Producer will lose confidence in economy resulting into less production an consumption deepening the economic downfall into another level.