This chart, which plots consumer confidence against incidences of news stories about the fiscal slope, finally shows the consumer affected by the uncertainty and fear from Congressional action (or lack thereof) tanking the economy. Since the summer, the consumer has been buoyed by a number of factors, including a recovery in housing prices and incremental improvements in the job market.
But just think about it. Every day for the last month, you pick up your paper or set your browser to read about the lack of progress here and the lack of progress there, and the dangerous consequences of inaction, and the parallel need to deal with the legacy of inherited debt. Of course, this hysteria makes no sense. The fiscal slope serves as a threat because it would reduce the deficit TOO QUICKLY, with the resultant austerity causing an economic shock. But you aren’t reading too closely, you just get the impression of some general economic panic that can only subside if a Congress that has a 9% approval rating does something responsible. And you probably don’t think that’s a very likely option.
So you get depressed, because there’s some big economic event that has to do with the deficit and taxes or something coming down the pipe, and nobody seems to know how to deal with it. And as a result you start to save your cash. After all, taxes are going up, and who knows about that job your sister just got, you might have to lend her some money down the road. And this pullback means a gradually worse holiday season, and retailers will lay off a bunch of people in January anyway.
This describes a textbook drop in consumer confidence. We saw it during the debt limit deal and we’re seeing it now. The problem is that the media has described what’s actually happening so poorly that the consumer doesn’t really even know what the problem is or what they should advocate. Do they get that the “fiscal cliff” means a combination of tax increases and spending cuts that would wreck the economy? Do they have the conception of budget cuts being bad for the economy, after three years of non-stop panic about high deficits? This confusion makes it very difficult to reach a solution that works for the economy.