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University of Michigan Consumer Confidence plunged to 72.9
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Confidence plunged in December as consumers confronted the rising likelihood that political grid-lock would push the country over the fiscal cliff. Consumers were more pessimistic about their future finances, and more pessimistic about the outlook for the overall economy and job prospects. One-in-four consumers spontaneously mentioned hearing about prospects for higher taxes when asked to identify what economic news they had heard, the highest level ever recorded. While the Sentiment Index is still well above the August 2011 low associated with the Congressional debate on taxes, spending and the deficit, if no resolution is reached the falloff could easily worsen in the weeks ahead. Discounted prices and record low interest rates have forestalled declines in buying attitudes but consumers are likely to reduce purchases if income or payroll taxes increase in 2013.
Personal Finances Weaken
Personal financial expectations fell to their lowest level in a year. Financial gains were expected by just one-in-four households in December; the majority anticipated no income increase. Even though consumers expected a low inflation rate, the majority nonetheless expected a declining inflation-adjusted income in the year ahead.
Economic Slowdown, Rising Unemployment Anticipated
Consumers anticipated at least a slowdown in economic growth. They more frequently expected a downturn during the year ahead without a resolution to the fiscal cliff. Just one-third of all consumers expected an uninterrupted expansion over the next five years. The proportion that expected a rising unemployment rate during the year ahead jumped to 35% in December, up from 19% in October, and the highest level since the summer of 2011.
Consumer Sentiment Index
The Sentiment Index was 72.9 in December 2012, down from 82.7 in November, but just above last December’s 69.9. Most of the December decline was in the Expectations Index, which fell to 63.8, down from 77.6 in November and the lowest levels since last December’s 63.6. The Current Conditions Index fell to 87.0 in December from 90.7 in November and was well above last December’s 79.6.
Confidence is lost much more easily than it can be regained, and the pessi-mism created by not reaching a reso-lution before year-end will be difficult to reverse even if a settlement is reached soon after the start of 2013. Blaming one side or the other for failure will only increase pessimism as it reflects a dys-functional system for setting economic policy. Moreover, the details of the settlement matter, as it is hard to imagine a positive reaction if it did not include the extension of the payroll tax cut. While tax hikes on top incomes will result in spending declines, ending the payroll tax holiday will result in significant losses in confidence and spending.
Posted: December 21, 2012 Friday 10:00 AM