Question

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

Figure 10 – University of Michigan: Consumer Sentiment (UMCSENT), last year

Figure 11 – S&P 500 (SP500), last year

Figure 12 – 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.University Of Michigan :- Consumer Sentiment ( UMCSENT ), last year: The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan. It is based on telephone surveys that gather information on consumer expectations regarding the overall economy. The index, introduced in 1946 by George Katona at the university, is designed to capture the mood of American consumers with regard to their economic well-being and outlook. Whether the sentiment is optimistic, pessimistic or neutral. Each month a minimum of 500 phone interviews are conducted across the continental U.S. There are around 50 core questions that cover three broad areas of consumer sentiment: personal finances, business condition and buying conditions. According to the University of Michigan, the surveys "have proven to be an accurate indicator of the future course of the national economy."

They generally ask this kind of questions:-

• "Would you say that at the present time business conditions are better or worse than they were a year ago?"
• "Would you say that you are better off or worse off financially than you were a year ago?"
• "Do you think that a year from now you will be better off financially, or worse off, or just about the same as now?"
• "What do you think will happen to interest rates for borrowing money during the next 12 months — will they go up, stay the same, or go down?"
• "During the next 12 months, do you think that prices, in general, will go up, or go down, or stay where they are now?

S&P 500 (SP500), last year:-  The S&P 500 (Standard & Poor's 500 Index), or just the S&P is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE, NASDAQ, or the Cboe BZX Exchange. It is a weighted index of the 500 largest U.S. publicly traded companies.  S&P 500 is one of the most commonly followed equity indices. It is one of the best representations of the U.S. stock market.

St. Louis Fed Financial Stress Index (STLFSI):- The St. Louis Fed Financial Stress Index (STLFSI) measures the degree of financial stress in U.S. markets. The STLFSI combines 18 financial market variables into a single index that is compiled on a weekly basis. The index consists of seven interest rate series, six yield spreads and five other indicators. As levels of financial stress in the economy change the underlying variables should move together. A value of zero represents the long-term average of financial market stress. Values above zero indicate above-average financial stress while values below zero indicate below-average financial stress.

These three indicator detect the health of US market. Consumer sentiment provide the information about personal financial situation, business situation of the economy and buying condition of consumers. Where as S&P 500 is one of the most widely quoted American indexes because it represents the largest publicly traded corporations in the U.S. and St. Louis Fed Financial Stress Index (STLFSI)  is reflecting a broad set of market signals, including interest rates and yield spreads.

2.

	jan	dec	jan	M-M	Y-Y
	2019	2018	2018	CHANGE	CHANGE
Index of consumer sentiment	91.2	98.3	95.7	-7.2%	-4.7%
current economic condition	108.8	116.1	110.5	-6.3%	-1.5%
Index of consumer	79.9	87	86	-8.2%	-7.4%
Expectation

Consumer sentiment remained at month-end at its lowest level since Trump was elected. It could foster sustained declines in economic optimism among consumers. Continued strength in consumer spending is essential. Consumers were not as optimistic about future gains  which was a consequence of the expected weakening of the economy.

S& P 500-Performance is calculated as the % change from the last trading day of each year from the last trading day of the previous year. The current price of the S&P 500 as of February 13, 2019 is 2,753.03.  The index primarily mirrors the overall performance of large-cap stocks.  The S&P 500 is considered by analysts to be a leading economic indicator for both the stock market and the U.S. economy. The average annualized total return for the S&P 500 index over the past 90 years was 9.8%. In 2017, the S&P 500's total return was over 19.7%.  There can be quite a bit of volatility each year in the index. Investor have to think twice before investing such equity.

St.Louies fed financial crisis:- Financial stress decreased in the week ended January 4 2019 , the first decline since November. Although the benchmark remains below zero, which implies a market conditions that are less stressful than average. Economy is growing but at slower rate. Firm can be optimistic to invest in these market.