No Cliff Dive But Plenty Of Dangers Remain For Foodservice And The American Economy

Unless you spent the holidays on another planet or at least on a remote island paradise with no media access, you are aware that Congress and the Obama Administration cobbled together in early January a package that made permanent the Bush-era income tax cuts for all but the wealthiest Americans.

This will almost certainly reverse, at least partially, the steep declines in consumer confidence and expectations recorded in late December by both the Thomson Reuters/University of Michigan Surveys of Consumers and The Conference Board.  The UM Consumer Sentiment Index fell 9.8 points and The Conference Board Consumer Confidence Index dropped six points. But the worrying numbers were the expectations indices from both groups. The Conference Board’s future-looking index plummeted nearly 14½ points while that from UM dropped 13.8 points.

The tax deal, along with another modestly positive jobs report released Jan. 4, should buck up the American consumer, at least temporarily, now that they know the most draconian tax increase possibilities are behind us.

But the deal on taxes was a very limited one that set up a new series of deadlines over raising the debt ceiling, figuring out how to address the “sequestered “federal spending cuts that were part of fiscal cliff deadline (those were put off for two months), and funding continuing spending at the federal level, which is now operating on a “continuing resolution” basis.

As the UM Surveys Chief Economist Richard Curtin reminded us in his group’s Dec. 21 release of final December numbers,  the previous debt-ceiling fight in July and August 2011sent consumer confidence to near record lows. And he also worried about the spending impact of not extending the two-point payroll tax holiday. Such an extension was not part of the deal and was barely mentioned by either party during the negotiations. The payroll tax hike will take an additional 2% from nearly all Americans working for wages and salaries. Curtin believed before the deal that such a hike would “result in significant losses in confidence and spending.”

Several aspects of the tax deal will probably help the equipment and supplies market. Thanks in part to intense lobbying from the National Restaurant Association , accelerated depreciation was extended for foodservice operators investing in capital goods and upgrades. We’ll report more on that in the next issue of FER Fortnightly.

The deal also raised the rate on capital gains to 20% from the existing 15%, less than many investors had feared, and extended the “interest roll-over” provisions that allow many private equity and hedge funds to treat income as capital gains rather than ordinary income. This may buoy up private equity and other investments in restaurant chains.

But the hard reality is that uncertainty over how the U.S. will resolve the intense, bitter fight over taxes, government spending and the deficit look to continue for months to come. And that means continued uncertainty about consumer spending and foodservice operators’ willingness to invest in new equipment and facilities.