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Fiscal Cliff Fears Hit Consumer Confidence

 December 28, 2012 09:41 AM

(by Mani) All the talk, hype and grim reality of the fiscal cliff finally caught up with consumers in December. Consumer confidence declined 6.4 points in December as the expectations series plummeted 14.4 points.

By contrast, the continued improvement in the labor market helped to pull consumers' views on current conditions 5.4 points higher to 62.8, which marks the highest level for the present situation index since August 2008.

The sharp split between how consumers view the present economic situation and future economic conditions drives home the importance on reaching an acceptable and credible agreement on the issues making up the fiscal cliff.

A good resolution could build on the recent good news in the labor market and send confidence higher. A bad outcome that results in higher taxes, less-than-credible spending cuts and continued uncertainty might send consumer confidence even lower as consumers incorporate their fears about future economic conditions into their current behavior.

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"The split in the two major components of consumer confidence is one of the starkest in recent memory and presents both a warning and an opportunity," Wells Fargo economist Mark Vitner wrote in a note to clients.

The December's 5.4-point rise in the present situation series is the second large gain in the past four months and suggests that there is some real improvement taking place in the broader economy.

"There has not been a sudden breakout in economic optimism but rather a bit of a slide in pessimism," Vitner said.

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The proportion of households stating that current economic conditions are bad has fallen 7 points over the past four months to 27.3 percent. The proportion rating conditions as good rose just 1.8 points over this period to 17.1 percent while the remainder noted that conditions were normal.

Consumers are also less downbeat about the labor market. The proportion of households stating that jobs are hard to get has fallen by 5 points over the past four months to 35.6 percent. The share stating that jobs were plentiful rose 3.1 points to 10.3 percent while the share stating that jobs were not so plentiful rose 1.9 points to 54.1.

"The gains in consumers' views of the present economic situation could prove fleeting if the resolution of the fiscal cliff causes their fears about future economic conditions to be realized. All three components of the expectations series weakened in December," Vitner noted.

The proportion expecting business conditions to worsen rose 5.7 points, the proportion expecting fewer jobs to be created rose 6.1 points and the proportion expecting income to decrease rose 2.9 points to 18.7 percent.

The rise in anxiety about what future economic conditions might bring may have played a factor in the apparently disappointing end to the holiday shopping season.

Whether that is a harbinger of what 2013 will bring will likely depend on what happens in Washington, D.C. over the next few days.

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