Consumers Figure Out Falling From The Fiscal Cliff Could Hurt

Two economic reports released last Friday, Dec. 7, obscured even more the short-term outlook for U.S. consumer spending. On the one side, the top-line numbers in the Bureau of Labor Statistics monthly jobs report came in better than forecast, with 146,000 net new jobs added while the unemployment rate dropped to 7.7%. On the other, the preliminary December reading on consumer sentiment plunged more than eight points, as consumers have begun to realize all this talk about a fiscal cliff, with pending tax increases that affect nearly everyone, could hurt them.

The preliminary report from Thomson/Reuters University of Michigan Surveys of Consumers shows just how volatile and vulnerable consumer confidence is as the fiscal drama plays out in Washington. The UM Sentiment Index hit a four-year high in the preliminary report last month before falling a tad in the final November measure reported before Thanksgiving. The Conference Board’s Consumer Confidence Index for November, released late last month, rose slightly from October.

But with news reports on the negotiations over the fiscal impasse proliferating, the new UM survey found one in four consumers mentioning they had heard about potential higher taxes as a result of the fiscal cliff. “Consumers confronted the rising likelihood that political gridlock would push the country over the fiscal cliff,” UM Surveys of Consumers Chief Economist Richard Curtin said.

He also noted the decline in confidence was much more pronounced among households in the bottom- and top-thirds of family incomes. Curtin has for months been cautioning that the end of the 2% payroll tax holiday in place for the past two years will impact almost all consumers and cut into disposable income for less-well-off consumers the most. Richer families appear worried about the impact of higher taxes proposed by President Obama and other Democrats even if the other Bush-era tax cuts are maintained.  “While a spending reduction from tax hikes on top income households can be anticipated, it will not influence confidence or spending as much as the end of the payroll tax holiday,” Curtin said.

The employment report, when analyzed in depth, appeared somewhat less positive than might appear, as it included a 0.2% drop in the “participation rate,” a sign some seeking jobs have become discouraged. The BLS also revised downwards job- creation numbers for September and October. Construction employment fell by 20,000 jobs in November and manufacturing jobs rose only 11,000. Leisure and hospitality jobs rose again, with net jobs up 23,000. The sector, which includes foodservice, had grown by 305,000 in the past 12 months.

Still, the top line numbers are what most American consumers hear and the better than expected employment trend could whipsaw consumer confidence even more. Sometimes one must just wait and see.