Consumer sentiment at year low; fiscal debate weighs

NEW YORK Fri Jan 18, 2013 1:44pm EST

A shopper walks down an aisle in a newly opened Walmart Neighborhood Market in Chicago in this September 21, 2011 file photo. REUTERS/Jim Young/Files

A shopper walks down an aisle in a newly opened Walmart Neighborhood Market in Chicago in this September 21, 2011 file photo.

Credit: Reuters/Jim Young/Files

NEW YORK (Reuters) - Consumer sentiment unexpectedly deteriorated for a second straight month to its lowest in over a year in January, with many consumers citing fallout from the recent "fiscal cliff" debate in Washington, a survey released on Friday showed.

The sharp drop in sentiment over the last two months coincides with rancorous federal budget negotiations that have led to higher taxes for many Americans.

Just weeks after that deal, President Barack Obama and Republican lawmakers are expected to enter another tough round of negotiations over spending cuts, which could dent consumer confidence still further.

"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," said Thomas Simons, a money market economist at Jefferies & Co. in New York.

While most of the scheduled tax hikes and spending cuts forming the fiscal cliff were avoided when Congress struck a deal on January 1, most U.S. workers saw their take-home salary diminished by the expiry of two percentage-point cut in payroll taxes.

"With the debt ceiling yet to be tackled and more political acrimony on the way, we suspect that confidence has room to deteriorate further," Simons said.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 71.3, down from 72.9 the month before. The index was at its lowest since December 2011. It was also below the median forecast of 75 among economists polled by Reuters.

"The most unique aspect of the early January data was that an all-time record number of consumers - 35 percent - negatively referred to the fiscal cliff negotiations," survey director Richard Curtin said in a statement.

"Importantly, the debt ceiling debate is still upcoming and could further weaken confidence," he said.

House Republicans have signaled they might support a short-term extension of U.S. borrowing authority when the government exhausts that capacity sometime between mid-February and early March. A failure by Congress to raise this debt ceiling could result in a market-rattling government default.

On Friday, Republican House Majority Leader Eric Cantor said the House would consider a bill next week to extend the debt limit by three months in order to force the Senate to pass a budget.

U.S. stocks remained little changed after the data. The S&P 500 .SPX hit a five-year high in the last session. But on Friday, a weak outlook from Intel (INTC.O) offset encouraging data out of China and a fourth-quarter profit at Morgan Stanley (MS.N).

So far there has been a disconnect between what consumers say and do. U.S. retail sales increased a better-than-expected 0.5 percent in December. But given the recent weakening in sentiment investors will be watching for any signs that spending is starting to slip.

"The impact on consumers will be from the hike in the social security tax. That is undoubtedly going to hit discretionary spending. So this may be a signal of things to come," said Michael Woolfolk, a senior currency strategist at BNY Mellon in New York.

The consumer survey's barometer of current economic conditions fell to 84.8 from 87.0 and was below a forecast of 88.0. The gauge hit its lowest since July.

The survey's gauge of consumer expectations also slipped, hitting its lowest since November 2011 at 62.7 from 63.8, and was below an expected 65.2.

The survey's one-year inflation expectations rose to 3.4 percent from 3.2 percent, while the survey's five-to-10-year inflation outlook was unchanged at 2.9 percent.

(Additional reporting by Steven C. Johnson and Ellen Freilich; Editing by Andrea Ricci)

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Comments (4)
MikeyLikesIt wrote:
Well I don’t know about the rest of you millionaires, but my taxes went up for my first January paycheck. So I have already started cutting back on my expenses in order to keep my budget in the black (imagine that, cutting spending to balance your budget!!)

Add on to that the inflation we are seeing on basic consumer goods and it’s no wonder people are starting to trim the fat.

And of course by “millionare” I mean gross pay under $50,000.

Jan 18, 2013 12:10pm EST  --  Report as abuse
Abulafiah wrote:
It is not rally surprising that a dysfunctional, childish, obstructionist congress decreases consumer confidence. It is a pity the GOP won’t just get out of the way and let the economy recover.

Jan 18, 2013 12:36pm EST  --  Report as abuse
MikeyLikesIt wrote:
@Abulafiah

I pity your complete lack of knowledge regarding the US budget process. The democrats couldn’t pass a budget even when they had complete control of the House, a supermajority in the Senate and the Presidency.

How is that the Republican’s fault?

Wait, don’t answer that, I’m allergic to BS.

Jan 18, 2013 2:05pm EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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