Consumers’ spirits sink in December; fears of ‘cliff’ cited

An H&M store in Atlanta drew shoppers earlier this month, but consumers’ conÿdence tumbled in December, driven lower by fears of sharp tax increases and government spending cuts set to take effect next week.
An H&M store in Atlanta drew shoppers earlier this month, but consumers’ conÿdence tumbled in December, driven lower by fears of sharp tax increases and government spending cuts set to take effect next week.

— U.S. consumer confidence tumbled in December, seen to be driven lower by fears of sharp tax increases and government spending cuts set to take effect next week.

The Conference Board said Thursday that its consumer confidence index fell this month to 65.1, down from 71.5 in November. That’s the second-straight decline and the lowest level since August.

The survey showed that consumers are slightly more optimistic about current business conditions and hiring. But their outlook for the next six months deteriorated to its lowest level since 2011.

Lynn Franco, the board’s director of economic indicators, said the decline in expectations for the next six months is a signal that consumers are worried about the “fiscal cliff.” That’s the name for the automatic spending cuts and tax increases that take effect Tuesday if the White House and Congress can’t reach a budget deal.

A separate survey released last week by the University of Michigan showed consumer confidence fell in December to a five-month low. And a report from MasterCard Advisors’ SpendingPulse unit indicated that Christmas sales grew in the two months before Christmas at the weakest rate since 2008, when the country was in a deep recession.

The December drop in confidence “is obvious confirmation that a sudden and serious deterioration in hopes for the future took place in December — presumably reflecting concern about imminent ‘fiscal cliff’ tax increases,” Pierre Ellis, economist with Decision Economics, wrote in a note to clients.

Stocks fell sharply after the consumer-confidence report was released in the morning. The Dow Jones industrial average dropped 150 points before recovering after Republicans said they would reconvene the House of Representatives on Sunday to work on a budget deal. The Dow fell 18.28 points to 13,096.31. Broader indexes also declined.

The Conference Board index has risen from an alltime low of 25.3 touched in February 2009. It remains well below the level of 90 that is consistent with a healthy economy. It last reached that point in December 2007.

Although consumers are more worried about where the economy is headed, they were upbeat about present conditions, according to the latest survey.

“The economy is holding up just fine right now,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “Folks that are thinking there was going to be some cataclysmic economic shock to close out the year; I don’t think that’s right.”

Other reports Thursday show that the economy is improving. The average number of people filing for unemployment benefits over the past month fell to the lowest level since March 2008, the Labor Department said.

The Labor Department said Thursday that weekly applications dropped 12,000 to a seasonally adjusted 350,000 in the week that ended Saturday. The four-week average, a less volatile measure, fell to a nearly five-year low of 356,750.

Still, the Christmas holiday may have distorted the figures. A department spokesman said many state unemployment offices were closed Monday and Tuesday and could not provide exact data. That forced the government to rely on estimates. Normally, the government might estimate application data for one or two states. Last week, it had to use estimates for 19.

The estimates are usually fairly accurate, the spokesman said. Even so, the government will likely revise the figures by more than normal next week.

Weekly applications are a proxy for layoffs. They have mostly fluctuated this year between 360,000 and 390,000. At the same time, employers have added an average of 151,000 jobs a month in the first 11 months of 2012. That’s just enough to slowly reduce the unemployment rate.

Economists were mildly encouraged by the decline in applications. But they emphasized that the figures are volatile around the holidays. They were also distorted until recent weeks by Hurricane Sandy.

Many expect next week’s jobs report to show that employers added about 150,000 jobs in December.

The drop in consumer confidence in December comes as retailers are wrapping up a Christmas shopping season in which consumers have spent more cautiously than expected. Consumer spending drives roughly 70 percent of economic growth.

There were other distractions this Christmas season. In late October, Sandy battered the Northeast and mid-Atlantic states, which account for 24 percent of U.S. retail sales. That, coupled with the presidential election, hurt sales during the first half of November.

Shopping picked up in the second half of November. But worries about the budget negotiations in Washington dampened sales in December.

The National Retail Federation, the nation’s largest retail-trade group, remains optimistic that sales won’t be quite as bad as earlier reports have suggested. It is sticking to its forecast for total sales for November and December to be up 4.1 percent to $586.1 billion this year. That’s more than a percentage point lower than the growth in each of the past two years, and the smallest increase since 2009 when sales were up just 0.3 percent.

Information for this article was contributed by Paul Wiseman, Christopher S. Rugaber and Anne D’Innocenzio of The Associated Press and by Lorraine Woellert and Michelle Jamrisko of Bloomberg News.

Front Section, Pages 1 on 12/28/2012

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