The fiscal cliff is causing a drag on the economy and, in particular, the desire of consumers to want to spend. The reality is that the budget cuts and tax increases will impact spending regardless of how the deal turns out, as taxes will rise.
The push to extend the Bush-era tax cuts to only those making below $250,000 appears to be a pipe dream of President Obama.
So far, after several failed attempts at a compromise, the Republican-controlled House is looking to push forth what they call “Plan B,” which extends the Bush-era tax cuts to those making less than $1.0 million. President Obama suggested he would veto Plan B, which would likely not get approval in the Democratic-controlled Senate. Obama has moved up the threshold for the tax cuts to $400,000, up from $250,000.
So while this deal-making goes back and forth, consumers are likely to be hesitant to spend in the retail sector. The headline retail sales reading rose 0.3% in November, which was below the Briefing.com 0.6% estimate, but up from -0.3% in October. The ex-auto reading was flat, lower than the Briefing.com 0.2% estimate. While the November retail sector numbers don’t translate into December, I’m sensing the uncertainty of the fiscal cliff will impact consumer spending during this key shopping season for the retail sector.
We are in the heart of the holiday shopping season. I’m sure the retail sector is anxiously praying for consumers to spend. (Want to know which retailers I like? Read “From Discount to Big Box: Some Retailers to Watch.”)
A strong shopping season will also go a long way toward helping the retail sector and economic recovery.
The two recent jobs reports added some optimism to the retail sector; albeit, I doubt it will be enough to drive consumers to the malls and online to spend. We need to see progressive and stronger job creation going forward to instill some confidence in shoppers. In the best-case scenario, if job creation rises, this would likely translate into higher sales in the retail sector.
Retail sales have increased in three straight years, according to the National Retail Federation (NRF), and the hope is that 2012 will continue the uptrend.
The monthly retail sales numbers in the retail sector are showing some encouraging signs. The Thomson Reuters Same Store Sales Index (comprising 17 U.S. retail chains) increased 1.6% in November, below the 4.3% estimate, due to the impact of Hurricane Sandy.
I’m seeing some optimism returning to consumers. Consumer confidence in November came in at a four-year high of 73.7, versus 73.1 in October, according to the Conference Board. The reading is encouraging, but it’s still well below the widely accepted reading of 90 that indicates a healthy economy, and this hasn’t materialized since December 2007, when the recession began. It looks like it will be some time until the confidence reading heads back up to a normal level.
The reality is that when consumers are more confident, they tend to spend more on major purchases in the retail sector, such as homes, vehicles, furniture, appliances, and travel. This spending then impacts gross domestic product (GDP) growth and the ability of companies to expand their businesses. The worries surrounding the fiscal cliff will likely impact spending.
The reading for durable goods orders on an ex-transportation basis for October came in at 1.5%, better than the -0.5% Briefing.com estimate, but below September’s 1.7% growth.
The bottom line is that the ongoing debate on the fiscal cliff will likely hamper December retail sales at a time when the retail sector needs consumers to spend.