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Corporate chiefs fear ‘fiscal cliff,’ but consumers are unfazed

Shoppers carry bags while passing in front of a store at the Fair Oaks Mall in Fairfax, Va.
(Andrew Harrer / Bloomberg)

WASHINGTON — U.S. companies had been pulling the country out of the Great Recession. Now, though, consumer confidence is rising higher than it has in years, while companies are spooked about the nation’s risk of going off the so-called fiscal cliff.

As politicians and business executives fret, economists wonder whether consumers now can start spending more heartily and take a bigger role in the recovery.

So worried are major U.S. corporations about the potential fall from the cliff — the combination of expiring tax cuts and automatic federal spending reductions at the start of next year — that they have mounted a full-court press on the White House and Congress to avert the potential hit of more than $500 billion to the economy next year.

Quiz: How much do you know about the “fiscal cliff”?

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Business leaders have launched a blizzard of ads, announced contingency plans that include threats of layoffs and voiced their angst at a Wednesday sit-down with President Obama.

Consumers, on the other hand, have been largely unfazed, if somewhat perplexed, by it all.

Although some ordinary Americans may be bracing for trouble ahead, leading measures of consumer sentiment belie any broad indication of worries: Surveys this month by both Gallup and the University of Michigan show consumer confidence rising to the highest level since the recession in 2008.

In part that’s because job growth has been improving, the housing market is finally climbing out of the bottom, and many families, after paying down debts for several years, are feeling better about their finances than they have in a long time.

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Even so, a report Wednesday showing that retail sales dropped in October prompted the National Retail Federation to warn that consumers were starting to pull back because of concerns about the fiscal cliff, though most analysts attributed the drop-off to other factors, including the storms in the Northeast.

Polling data indicate that most Americans don’t have a good handle on what all the fiscal-cliff talk is about, which may partly explain consumers’ sunny mood. The Pew Research Center said this week that only one-fourth of the people it surveyed in recent days understood “very well” the effect of the changes due Jan. 1.

“I think they believe more or less the campaign rhetoric that taxes won’t go up,” said Richard Curtin, the longtime director of the University of Michigan consumer surveys.

In particular, he said, the public seems to be conflating the impending expiration of payroll tax cuts from the last two years with federal income taxes that were lowered under President George W. Bush early last decade.

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The two taxes are different, and most analysts see very different outcomes for them. Most say there’s a good chance that lawmakers won’t extend the payroll tax cut but probably will act in time to stop the full extent of the income tax hikes and federal spending reductions from taking effect.

An end to the payroll tax holiday means the average worker would take home about $1,000 less next year. That translates to about a $100-billion loss for the economy. Economists reckon policymakers also aren’t likely to renew federal extended unemployment benefits, draining as much as $40 billion more from the economy next year.

Although these moves would clearly hurt many people, most economists say they won’t wreck the economy. But they probably will do enough harm to keep the recovery from gaining momentum in the first half of next year.

Since officially emerging from the deep recession in mid-2009, the economy has grown in fits and starts, weighed down by the depressed housing market, large household debts and a number of external shocks, including Europe’s debt woes, political uprisings in the Arab world and Japan’s earthquake and tsunami.

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“Right now we’re not going to get a breakout [in growth] because of the fiscal cliff and Europe,” said Ben Herzon, senior economist at Macroeconomic Advisers, a forecasting firm in St. Louis. And there won’t be a breakout early next year, he said, because of the likely end to the payroll tax cut.

The more worrisome scenario, of course, is that there is no resolution and the country goes over the cliff, resulting not only in higher payroll and income taxes but significant reductions in military and non-military federal spending. By most analysts’ accounts, the economy would then be at risk for falling into recession.

Obama, in his first news conference Wednesday after a decisive reelection victory last week, insisted that he would not extend the Bush-era tax cuts for high-income Americans. He left open the door to ideas that could close the deficit without raising the income tax rate for upper-income filers, but suggested that this would be difficult.

“We should not hold the middle class hostage while we debate tax cuts on the wealthy,” he said.

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Later in the day, the president met with chief executives of a dozen major U.S. employers in a session closed to the media and public. Some of the CEOs have been speaking out in recent days, calling on Obama and lawmakers to act now to avoid the fiscal cliff.

“Every day the fiscal cliff remains unresolved is one more day of uncertainty that’s holding back both America’s economic recovery and American business,” Robert McDonald, chairman and CEO of Procter & Gamble Co., was quoted as saying in one of the ads released by the Business Roundtable this week.

Some companies are said to be preparing backup plans that include layoffs in the event that the White House and lawmakers can’t reach a deal. Some businesses and analysts said the uncertainty already has held back hiring, although fiscal-cliff worries appear to have hurt capital spending more in recent months.

“Instead of taking it out on payrolls, businesses are taking it out on investments,” said Mark Zandi, chief economist at Moody’s Analytics.

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For now, he said, “consumers aren’t feeling it,” partly because they’re happy about rising home values and lower gas prices and have become inured to an American political process that doesn’t seem to cut a deal until lawmakers’ feet are held to the fire.

Curtin, the University of Michigan economist, noted that there has been a drop in confidence among consumers earning more than $250,000, suggesting that more people think taxes will go up for the wealthy. But for the most part, the fiscal cliff isn’t on the forefront of their concerns — at least not yet.

“I think there will be a wake-up moment,” he said. “I don’t think consumers are thinking that it has to be settled any day now. But I think if it isn’t settled before the end of the year, then you would see a sharp rise in discontent among consumers.”

don.lee@latimes.com

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