In January, consumer sentiment hit its lowest point since 2011, according to the Thomson Reuters and the University of Michigan study.
The decline in confidence came as Congress debated the “fiscal cliff” issue. The study found confidence had decreased for a second consecutive month, from a rating of 72.9 points in December 2012 to 71.3 points in January 2013. The rating is slightly above the 69.3 point average rating on the index during five recession periods, but it is 16% below the average rating of the entire index going back to 1978.
The Thomson Reuters analysts had predicted consumer confidence would rise to 75 points once the president and Congress made a deal on the fiscal cliff.
Thomson Reuters found 35% of consumers referred “negatively” to the fiscal cliff negotiations. While this might not sound like a high number, report director Richard Curtin assured the media that this is an unprecedented number of consumers who feel this way. He pointed to this fact as “the most unique aspect” of the January data.
The fiscal cliff deal did not avoid all of the tax increases that were set for Jan. 1. For example, a temporary payroll tax cut expired on that day. Some of the diminished consumer confidence is due to these tax increases. Thomas Simons of Jefferies & Co. told Reuters, “The handling of the fiscal cliff talks and the realization that paychecks are going to be smaller due to the sunset of the payroll tax holiday are probably weighing on consumer attitudes at the moment.”
The study found that several other aspects of consumer sentiment, beyond overall confidence, had fallen to very low levels by early January. Consumer expectation went down to its lowest level since November 2011 and the consumer barometer of current economic conditions hit its lowest since July. The one-year inflation expectation went up from 3.2% to 3.4%.
Curtin is predicting that the fiscal cliff issue is not done doing its damage to consumer sentiment. “Importantly, the debt ceiling debate is still upcoming and could further weaken confidence,” he said. Consumers will be watching as Congress continues to talk about the debt ceiling, raising taxes and the possibility of default.
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