November 21, 2012
Even if the country doesn’t slide over the fiscal cliff, any deal to
blunt the impact of the scheduled tax hikes and spending cuts is likely
to create at least some drag on an economy that is still growing only
modestly. The full package of changes set to take effect in January
would suck more than $600 billion out of the economy, according to the
Congressional Budget Office. And while the outlines of any deal are
still sketchy to say the least, Goldman Sachs economists are modeling a
$233 billion economic hit as their “base case scenario.”
Most of that impact, $218 billion, would hit you where it hurts: your
wallet. “Given the range of items in our base case fiscal cliff
forecast, consumers across the spectrum would be impacted,” Goldman
analyst Matthew Fassler wrote in a note published on Friday.
The biggest dent would come from the expiration of the payroll tax cut, with a total cost of $126 billion.
Goldman calculates that a $218 billion loss in consumer
income would translate to a $110 billion bite to consumer spending.
Based on past history, Fassler writes, “categories that could be most
impacted include autos, consumer electronics, home furnishings, home
improvement, lodging and gaming, specialty apparel, and sporting goods.
Categories that could be least impacted include drug stores, food, and
tobacco.”
While consumers have been less concerned about the fiscal cliff than
businesses, they may be starting to show signs of anxiety about the
upcoming policy changes as a steady drumbeat of media coverage plays up
the year-end deadline. A new holiday shopping survey by the Consumer
Electronics Association, the trade group promoting tech gadget makers,
found that the average American adult will spend $218 just from Thursday
through Monday, up sharply from $159 last year.
At the same time,
just over half (51 percent) of those surveyed said they would curtail
their overall holiday spending this year because of risks they see in
the fiscal cliff. Nearly one in five consumers said the cliff “was going
to have a large impact on their overall spending this holiday,”
according to the electronics group.
Those lost sales are precisely why Matthew Shay, the president and
CEO of the National Retail Federation, sent a letter to President Obama a
week ago urging quick action – “preferably before Thanksgiving” – to
avert the fiscal cliff. “Many retailers rely on the holiday season for a
quarter of their annual sales, and any disruption to consumer
confidence and spending during this season could prompt a crisis for
retailers and the millions of U.S. jobs the industry supports,” Shay
wrote.
“Demonstrating the ability to work in a bipartisan manner
will ease consumers’ worries and avoid severe economic consequences
during the single most crucial spending season of the entire year.”
Before
the cliff negotiations between Obama and congressional leaders began on
a somewhat optimistic note last week, the retail trade group had
forecast that holiday sales would increase 4.1 percent to $586.1 billion
this year. But, similar to the Consumer Electronics Association’s
findings, a National Retail Federation survey of more than 3,300 adults
conducted in early September found that about 57 percent knew what the
fiscal cliff was and 64 percent said that “the current political and
economic uncertainty” was weighing on their spending plans. In an early
October conference call with the media, Shay had warned that Congress’s
inability to act could be “the Grinch that stole Christmas.”
Analysts
at Moody’s Investor Service were more optimistic that consumers
wouldn’t let the policy Grinches in Washington completely spoil their
holiday shopping plans. “Consumers typically want to celebrate the
holidays by shopping, and in the past have shown their ability to ignore
negative fiscal policy headlines during the end-of-year shopping
season," Margaret Taylor, Margaret Taylor, a Moody's senior credit
officer, said in a statement.
Still, the Moody’s analysts said
consumers are likely to “rein in” their spending compared with last year
– Moody’s is projecting holiday sales growth of about 4 percent, down
from 6.5 percent in 2011 – “and are likely to pull back further in the
first quarter of the new year.”
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