Did Consumer Sentiment Fall Off the Fiscal Cliff?

The end of the payroll tax holiday and the possibility of continued political wrangling in Washington over the federal budget have left a mark on consumer sentiment. The benchmark survey, conducted by Thomson Reuters and the University of Michigan, showed that “consumer sentiment unexpectedly deteriorated for a second straight month,” reported Reuters.

Reaching its lowest level since December 2011, the index fell from last month’s reading of 72.9 to 71.3, several percentage points below the reading of 75 expected by economists polled by Reuters. While economists had forecast the survey’s barometer of current economic conditions to rise to 88.0, the gauge dropped to 84.8 from December’s 87.0. The survey’s gauge of consumer expectations also decreased, slipping from 63.8 to 62.7, the lowest reading since November 2011.

The reason many respondents gave for their reduced confidence was the recent debate over the fiscal cliff…

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“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,” Jefferies & Co money market economist Thomas Simons told Reuters. “With the debt ceiling yet to be tackled and more political acrimony on the way, we suspect that confidence has room to deteriorate further.”

Richard Curtin, the survey’s director, said in a statement that the upcoming debt ceiling debate could further weaken consumer confidence in upcoming months, as a failure to resolve the issue could result in a government default.

However, despite the worse-than-anticipated results, U.S. stocks were hardly affected. The S&P 500 hit a new five-year high on Thursday, boosted by reports that home builders launched new construction projects in December at the fastest pace since the summer of 2008 and that the number of weekly unemployment benefit applications fell to a five-year low last week.

Don’t Miss: The Cautious Optimism of Timothy Geithner.