Consumer Confidence Plunges Over the Cliff

Despite a better-than-expected November unemployment report, consumer confidence in the United States plummeted in December to its lowest level in four months.

The Thomson Reuters/University of Michigan’s preliminary index on consumer sentiment dropped to 74.5 this month, sharply lower when compared to the 5-year high of 82.7 in November. It was the lowest reading since August and well below estimates. Economists polled in a Bloomberg survey expected a median of 82.0, with the 67 economists projecting the figure to range between 80.0 and 88.0. Economists surveyed by Reuters placed a median forecast of 82.4 on the report.

The fiscal cliff, a combination of tax cuts expiring and a reduction in government spending, is taking the majority of the blame for the weak consumer sentiment. Stephen Stanley, chief economist at Pierpont Securities LLC, explains, “The fiscal cliff is going to bum people out. The consumer had held up pretty well into the summer and early part of the fall and in particular consumer attitudes had been super strong. My fear is that’s going to fade a little,” according to Bloomberg.

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The December consumer sentiment reading was the biggest miss on record, and the survey’s gauge on expectations for the future dropped to 64.6, its lowest point since August. The downbeat consumer news dampens the U.S. nonfarm payrolls report, which shows the headline unemployment rate declining to 7.7 percent. Although, a drop of more than 540,000 people in the labor force aided the decrease.

In addition to the fiscal cliff, which the country will plunge over in January if the two parties in Washington continue to bicker, consumers are feeling negative impacts on their wallets, never a good boost for confidence. The Commerce Department recently announced consumer spending, which accounts for about two-thirds of the economy, declined in October for the first time in five months. Meanwhile, the year-over-year change in average hourly earnings has been in sharp decline for the past three years.

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