U.S. Consumer Sentiment Slumps on Obama, Congress Tax-Cut Extension Delay

Concern that U.S. personal income taxes will increase next year caused an unexpected decline in consumer confidence in September, indicating the biggest part of the economy will struggle to pick up.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment dropped to a one-year low of 66.6, figures showed yesterday. The decrease was due entirely to a rise in pessimism was among households with incomes above $75,000, the group said. A separate report from the Federal Reserve showed household wealth declined 2.8 percent in the second quarter as stock prices fell.

While lawmakers have said they plan to extend the George W. Bush-era tax cuts for the middle class, they’re at odds about whether to continue them for wealthier Americans. The delay in achieving passage prompted declines in the higher income group’s views this month about personal finance, buying plans and prospects for the economy.

“Just not knowing whether you’ll get hit with a big tax hike is a huge negative,” said Nariman Behravesh, chief economist at IHS Inc., a consulting firm in Lexington, Massachusetts. “The delay and the uncertainty are dangerous.” Congress and the president “are playing with fire.”

Polls reflect diminishing support for President Barack Obama and his Democratic party as growth slows and employment stagnates. Just 33 percent of Americans surveyed by The Gallup Poll said they approve of the job Democrats are doing in Congress. A poll by Quinnipiac University taken Aug. 31 to Sept. 7 showed 56 percent of voters disapproved of Obama’s handling of the economy.

Net Worth Falls

Net worth for households and non-profit groups declined by $1.5 trillion to $53.5 trillion, according to the Federal Reserve’s Flow of Funds report. The decline was the first since March 2009.

The Standard & Poor’s 500 Index dropped 12 percent during the three months ended June 30, erasing gains from the previous quarter. While stock indexes have climbed this quarter, renewed signs of weakness in housing and unemployment near a 26-year high may prompt Americans to increase their savings, holding back the economic recovery.

Consumer confidence slipped in the Michigan survey among households earning more than $75,000, even as lower-income earners were more optimistic about their finances and buying plans.

“It is unusual to record such sharply divergent trends among income subgroups,” the group said in a statement yesterday. A report by Thomson Reuters/University of Michigan on Sept. 10 indicated the debate about the tax cut extensions had already hurt expectations among households with incomes topping $250,000.

Middle-Income Earners

Obama and most Democrats want the tax cuts, which expire Dec. 31, to be extended only for middle-income earners, while letting them lapse for the top 2 or 3 percent of earners. Republicans and some Democrats want the cuts extended for everyone.

Former Federal Reserve Chairman Alan Greenspan this week said he favors raising taxes to curb the federal budget deficit, joining the debate in Congress over whether to extend reductions under Bush. At the same time, he said raising taxes in a weak economy isn’t an ideal option.

The Michigan gauge of expectations for six months from now, which more closely projects the direction of consumer spending, dropped to the lowest level since March 2009. The “maximum negative impact” on expectations would occur if Congress delayed passage of the bill until after the November elections, the group said. Household purchases account for about 70 percent of the economy.

Prolonged Debate

The prolonged debate over the tax-cut extension is even more of a hurdle for decision-making by small businesses, which have put their investment and hiring plans on hold, Behravesh said. The longer it takes to reach a consensus, the more lawmakers risk causing a “wider ramification” for the economy, so they “need to get on with it,” he said.

“The uncertainty could translate into everybody trying to save a little bit more in anticipation of higher taxes,” Behravesh said. “I’m not saying consumer spending will collapse, but we could end up with very, very slow growth.”

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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