Why the Fiscal Cliff Is Impacting Consumer Spending
The fiscal cliff is causing a drag on the economy and, in particular, consumers’ desire to spend, due to the uncertainty of how the budgetary cuts and tax increases will impact income. If the fiscal cliff is allowed to proceed—and it will to some degree—the reality is that taxes will rise. I’m not sure if the middle class and those who earn less than $250,000 will be spared, but I do feel there will be a compromise made on the income tax increases.
In the meantime, consumers are likely to be hesitant to spend in the retail sector. The headline retail sales reading rose 0.3% in November, which was below the Briefing.com 0.6% estimate but up from -0.3% in October. The ex-auto reading was flat, lower than the Briefing.com 0.2% estimate. While the November numbers don’t translate into December, I’m sensing the uncertainty of the fiscal cliff will impact consumer spending in this key shopping season for the retail sector.
We are heading into the heart of the holiday shopping season. I’m sure the retail sector is anxiously praying for consumers to spend. A strong shopping season in the retail sector will also go a long way to helping the economic recovery, while also giving the stock market good news.
The two recent jobs reports added some optimism to the retail sector; albeit, I doubt it will be enough to drive consumers to the malls and online to spend. We need to see progressive and stronger job creation going forward to instill some confidence in shoppers. In the best-case scenario, if job creation rises, this would likely translate into higher sales in the retail sector.
Retail sales have increased in the last three straight years, according to the National Retail Federation (NRF), and the hope is that 2012 will continue the uptrend.
The monthly retail sales numbers in the retail sector are showing some encouraging signs. The Thomson Reuters Same Store Sales Index (comprising 17 U.S. chains) increased 1.6% in November, which was below the 4.3% estimate due to the impact of Hurricane Sandy.
I’m seeing some optimism returning to consumers. Consumer confidence in November came in at a four-year high of 73.7, versus 73.1 in October, according to the Conference Board. The reading is encouraging, but it’s still well below the widely accepted reading of 90 that indicates a healthy economy; this has not materialized since December 2007, when the recession began. It looks like it will be some time until the confidence reading heads back up to that level.
The reality is that when consumers are more confident, they tend to spend more on major purchases in the retail sector, such as homes, vehicles, furniture, appliances, and travel. This will impact spending, gross domestic product (GDP) growth, and the ability of companies to expand their businesses. The worries surrounding the fiscal cliff will likely impact spending.
The durable goods orders on an ex-transportation basis reading for October came in at 1.5%, better than the -0.5% Briefing.com estimate but below the 1.7% growth in September.
The bottom line is: the ongoing debate over the fiscal cliff will likely hamper December retail sales at a time when the retail sector needs consumers to spend.