December 9, 2012
A large number of Americans are starting to realize that if Congress doesn't get its act together before the end of the year, all taxpayers are going to be hit by higher taxes next year — whether they earn $12,000 a year or $12 million.
"It was a matter of time," said Leslie Levesque, an economist at IHS Global Insight. People are "feeling much worse about the future."
The sentiment showed up for the first time Friday in the University of Michigan Consumer Sentiment Index, a monthly index that showed its biggest fall in more than 11/2 years. Before that, the index had been showing Americans growing increasingly optimistic about the economy until after the presidential election Nov. 6, when focus shifted to the incessant political bickering about the so-called fiscal cliff.
The prospect that the country will go into a recession if there's no compromise on taxes, extended unemployment benefits and debt by the end of the year is wearing on people.
"This alters perceptions of future financial situations, job prospects and the health of the economic recovery," Levesque said.
Yet consumer feelings about the future do not always translate into action. And the government's recent data on credit card use shows consumers still willing to whip out the plastic, a practice that will be good for retailers if it holds up through the all-important holiday shopping season.
Credit card balances increased by $3.4 billion in November after falling by $2.2 billion in September. That's far from the shop-till-you-drop behavior of the pre-financial-crisis years, but still modestly encouraging to retailers.
"Households continue to spend on credit, but only on a limited basis," said Paul Edelstein, an economist with IHS Global Insight.
People seem to have learned from the financial crisis that too much debt in a rough job market can be painful. "They are only willing to run up their balances so far before paying them down," Edelstein said.
Meanwhile, the labor market has held up despite concerns about the impact of the fiscal cliff on business.
While announcing profits lately, numerous executives have expressed concern about a potential recession next year if taxes shoot up suddenly. But although they have cut back on purchases such as equipment during uncertain times, the nation's unemployment data released Friday indicate companies have been holding on to employees.
"That suggests that if we can successfully negotiate the cliff without a prolonged crisis and without too much fiscal tightening up front, employment growth should accelerate in 2013," Edelstein said.
In the week ahead, Capitol Hill will continue to be a preoccupation of economists and investors. In addition, attention will focus on the Federal Reserve meeting in which the Fed is expected to keep trying to stimulate the economy by purchasing U.S. Treasury bonds and keeping interest rates low. Some observers believe the stimulus is key as Congress toys with a still fragile economy.
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