USA Consumer Sentiment Plunges to 5-Month Low

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USA Consumer Sentiment: Thomson Reuters / University of Michigan

Confidence plunged in December as consumers confronted the rising likelihood that political gridlock 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. While consumers remain optimistic, that optimism is contingent on the promise of no higher taxes, except on the wealthy.

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Surveys of Consumers chief economist, Richard Curtin said, "Confidence is lost much more easily than it can be regained, and the pessimism created by not reaching a resolution 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 dysfunctional 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."

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