Will Consumers Flinch at Fiscal Cliffs’ Jab?

By TJ Kim

October 10, 2012

The year-end holiday season in the United States may not be as merry as all of us wish to be. Around the time nearing the end of 2012 and beginning of 2013, the U.S. will have to take a measure in solving the current deficit problem, so called Fiscal Cliff. In resolving the current deficit problem, the U.S. will either have to raise the debt ceiling or to raise taxes to increase revenue to pay off debt. While the issue is quite urgent with due date for resolution only a few months away, there has not been a decisive act from Congress, thus creating political uncertainty among businesses and consumers.

Steven C Wieting and Shawn Snyder from Citi group discussed in Will Consumer Flinch Ahead of Fiscal Cliff? – Holiday Sales 2012, the potential threat to consumer demand due to uncertainty regarding how the Fiscal Cliff will be resolved.

As we have witnessed in the past three months, the business capital spending has slowed significantly and more rapidly than fundamental indicators suggest. Mr. Wieting and Mr. Snyder wrote,

“While data over a three-month span doesn’t always define a clear event, the news on equipment and structures spending through August suggests policy uncertainty is restraining investment activity…Data on U.S. capital goods orders, shipments, and outlays for business structures over the past three months have weakened markedly compared to the pace of the past three years…the declines look suspiciously like a deliberate pulling back that might best be explained by unusually severe policy uncertainty…”

Now, despite recently improving Consumer Confidence, this negative sentiment in Business sectors may extend onto the spending public.

“Notably, it is possible for consumers to take note of politics and policy risks, as the deep declines in confidence in the third quarter 2011 – in close proximity to the debt ceiling fracas – show. But it also important to note that actual consumer spending didn’t miss a beat during that period. Had the drama played out in a way that produced an actual shock to the economy (even one well short of U.S. Treasury default), fear would have become reality.”

On the other hand, the major economic indicators still point to relatively stable consumer demand pattern, not flinching in the face of policy uncertainty.

“While business investment has slowed markedly – core capital goods orders have declined at a 26% annualized rate in the three months through August – consumer goods production has been far more steady. Inventories, including imports, have risen some, but since the onset of recession in 2008 they have declined outright and inventory/sales ratios have contracted. While not growing rapidly, consumer goods demand has simply not let up.”

Statistically, sales in the final two weeks of December account for a quarter of discretionary holiday retail spending. However, this year, the figure may be either severely damaged by the public fear at policy uncertainty or sustain because the public may have become “accustomed to high drama and last minute fiscal deal.”

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