12/10/12 – Consumers Start to Get Worried

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 10, 2012 8:14:33 AM

and tagged Fiscal Cliff, Yesterday's News

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I have written before about the disconnect between consumers, who have been spending as if the fiscal cliff didn’t exist, and business, which has cut back. That disconnect is starting to disappear as consumers become aware of the cliff and what it could mean.

Consumer confidence showed a material drop at the end of last week, due largely to growing public awareness that after-tax incomes will take a hit if the cliff isn’t averted. Other factors included gas prices and the stock market, both of which hit the expectations component. Looking forward, if confidence stays lower, we can expect consumer spending to drop as well—a problem, as it has been a major sustaining element of the recovery. A front-page story in the Wall Street Journal, “Consumer Spending Wobbles,” notes that spending was slower over the summer than previously believed and has continued to weaken into the end of the year.

News on the fiscal cliff negotiations is minimal. Obama and Boehner met over the weekend and are reportedly talking, but about what no one is saying. Several Republicans have gone on record saying it would be advantageous to fold on higher tax rates to refocus the debate on spending, but that hasn’t yet shown up in any public proposals.

The silence following the Obama/Boehner talks could actually be a good thing. Rather than letting any new proposals be roasted publicly, confidential negotiations allow both sides to craft a deal that might work as a whole, even if individual components get attacked. If that’s what is happening, it represents a lesson learned from the 2011 debt ceiling talks.

Good news included an above-expectations employment report on Friday, with 146,000 jobs created—well above the consensus expectation. And the U-3 unemployment rate dropped from 7.9 percent to 7.7 percent. Even the underemployment rate, which I consider a better indicator, dropped from 14.6 percent to 14.4 percent. There were offsetting factors, primarily larger-than-expected drops in government employment in previous months. Overall, however, this was a strong report, as private employment was actually revised upward over the same periods.

The fiscal cliff continues to loom, but, to date, the economy has slowly recovered, driven by steady employment growth and consumer spending. Despite the business uncertainty, employment growth has continued and shows no signs of slowing. Consumer spending, though, is worth watching. If it materially declines, it may well slow all other components of the recovery.

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