September 26, 2020

Washington Deadlock Hurts Consumer Confidence

Consumer confidence in the first half of December took a sharper-than-expected dip, falling to its lowest level since August, according to a new survey released Thursday by the Conference Board. Wall Street also registered its frustration with the stalemate in Washington on Thursday, sending stocks sharply lower before recovering late in the day.

The gloom comes despite signs the economy has been holding up recently during the rising worries — other data released Thursday showed a healthy gain in new-home sales and a slight drop in new jobless claims. Indeed, the Conference Board’s data show consumer anxiety is centered on the outlook ahead for the economy, rather than on current conditions.

“People are realizing that we may not get a compromise and they’re getting nervous,” said Guy Berger, United States economist with RBS Securities. “It’s a precarious situation. So far consumers are worried about the future. Once they start worrying about the present, we’re in trouble.”

If Congress and President Obama cannot agree on a deal to cut the deficit by Jan. 1, more than $500 billion in tax increases and spending cuts are set to take effect.

Taxes have been the main sticking point — while the president favors eliminating Bush-era tax cuts on incomes over $250,000 and preserving current rates for lower incomes, many Republicans have been wary of supporting any tax increase. Republicans have been pushing for deeper spending cuts, something many Democrats have resisted.

Both sides remained dug in, and at midday Thursday Senator Harry Reid of Nevada, the Democratic majority leader, said he thought it was unlikely a compromise would be reached before Jan. 1.

With Wall Street tracking every turn of negotiations in Washington, shares tumbled after Mr. Reid’s remarks but recovered later in the day after reports the House would reconvene Sunday and take up the issue. The Standard Poor’s 500-stock index fell 1.73 points, to 1,418.10, while the Dow Jones industrial average sank 18.28 points, to 13,096.31

While an eventual deal that blunts part of the effect is expected in the coming weeks, some fallout from missing the Tuesday deadline will be felt right away — including a two percentage point increase in payroll taxes as well as the end of unemployment benefits for more than two million Americans. All that has increased the uncertainty for individuals, who until recently had shrugged off the fiscal standoff in Washington.

“Expectations have certainly shifted and it seems like consumer attitudes have caught up with business confidence,” said Michael Griffin, executive director at Corporate Executive Board, a member-based advisory firm. Surveys by the group have shown business sentiment weakening for three consecutive quarters, he said.

Consumers have had reasons to be more optimistic lately. After a deep decline caused by the housing bubble, home prices have begun to recover in many parts of the country. And the job market has been showing signs of improvement, with unemployment hitting a four-year low of 7.7 percent in November.

On Thursday, the Labor Department reported that initial claims last week for state unemployment benefits fell by 12,000, to a seasonally adjusted level of 350,000. Figures for jobless claims have been volatile since Hurricane Sandy, but the four-week moving average for new unemployment claims now stands at its lowest point in nearly five years. Sales of new single-family homes in November rose 4.4 percent, to a seasonally adjusted annual rate of 377,000, according to the Commerce Department.

By contrast, the Conference Board’s consumer confidence index fell to 65.1 in December from 71.5 in November. That was much sharper than the 1.5 point drop economists had been expecting. The board’s expectations index was off more sharply, sinking to 66.5 from 80.9 in November.

Several economists said the current situation recalls the standoff over raising the federal debt ceiling in the summer of 2011. In that case, too, consumer confidence eroded as both sides in Washington refused to blink until the last moment, but experts added the consequences were likely to be longer-lasting this time because the changes in tax policy affect individuals directly.

“In a lot of ways, this is a replay of the summer of 2011,” Mr. Berger said. “But it’s more serious this time.”

The longer the stalemate continues, the deeper the damage, economists said.

“It takes a while for consumer confidence to go up but it takes just a short while for consumer confidence to go down,” said Chris G. Christopher Jr., senior principal economist at IHS Global Insight. “The fiscal cliff has put a damper on things, and retailers are going to feel it in December.”

“As we get closer to Jan. 1, and the political rhetoric gets ramped up, people get worried,” he said.

Article source:

Speak Your Mind