The Independent Market Observer

12/10/12 – Consumers Start to Get Worried

Posted by Brad McMillan, CFA®, CFP®

Find me on:

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

and tagged Fiscal Cliff, Yesterday's News

Leave a comment

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.

Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®