In November, consumer confidence was measured at 71.5. Today, it is barely above 58. That is a major decline.
This month, the Social Security/FICA tax was hiked on wage-earners. They are becoming pessimistic. They should.
The politicians thought a FICA tax hike was a no-brainer. The economy had recovered. The decrease, which began in 2010, was temporary. So, Congress figured, the tax could go back up without economic repercussions. Wrong!
Consumer confidence governs consumer spending. When they start to worry, they shift from luxuries to necessities. This disrupts economic forecasts. The firms that were selling marginal goods and services get hit. They cut back on hiring. Meanwhile, firms that get more demand do their best to hold down labor costs by adding more work on the backs of increasingly pessimistic workers.
The bloom is off the rose. There was not much of a bloom to start with.
We keep hearing about the American economy as heading into a new phase of growth. Then reality strikes. The predictions regarding the recovery were based on rising consumer confidence. Now that assumption is being called into question. If consumers go into turtle mode, what happens to the recovery?
Congress thought that the payroll tax hike would not have immediate negative economic consequences. This is now being called into question, Congress will be tempted to run a larger deficit. The $50 billion Hurricane Sandy bailout was a down payment. Keynesians love deficits. They place their faith in deficits. There will be less resistance to spending projects in Congress by the end of the fiscal year.
A trillion dollars a year adds up. The on-budget deficit will be more than a trillion dollars this year.
Congress does not care. We are on a speeding train. The trestle up ahead is on fire. Engineer Obama and the firemen in Congress do not see it, and they would not care if they did see it.