The University of Michigan and Thomson Reuters report that consumer confidence fell from 82.7 in November to 74.5 in December. After rising from July (72.3) through November, December’s reading marks a reversal on higher sentiment. This is largely due to worries about the fiscal cliff, as consumers are beginning to focus on its possibility more than in previous months.
While Americans’ perceptions about the current and future economic environment were both downgraded, it was the expectations component that declined by more. The forward-looking sub-index plunged from 77.6 to 64.6, or its lowest level since December 2011. The measure of current conditions decreased from 90.7 to 89.9, or more moderately.
This shift in sentiment is important, as consumer spending has been one of the main drivers of the economy this year. In fact, consumer spending added about one percentage point to the real GDP growth rate of 2.7 percent in the third quarter, with the bulk of that (0.82 percentage points) from the purchase of durable and nondurable goods. A worried consumer might pull back their spending, with major implications for the larger macroeconomy. Already, we have seen businesses decrease their investments and slow hiring – as noted in yesterday’s NAM/IndustryWeek survey and elsewhere. In fact, capital spending was a drag on real GDP in the third quarter, a trend that should continue into the current one.
Inflationary expectations in the University of Michigan survey remain modest, but did pick up slightly in December. Consumers expected prices to rise 3.3 percent over the next 12 months, up from 3.1 percent from November.
Chad Moutray is chief economist, National Association of Manufacturers.