Debt Deal Seen Boosting U.S. Consumers as Holidays Near: Economy

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Shoppers ride the escalators at the newly opened Hudson's Bay Co. Lord & Taylor LLC department store in Boca Raton, Florida. Close

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Photographer: Mark Elias/Bloomberg

Shoppers ride the escalators at the newly opened Hudson's Bay Co. Lord & Taylor LLC department store in Boca Raton, Florida.

American consumers are likely to breathe easier during the holiday shopping season now that lawmakers have struck a deal to avert a U.S. default and end a government shutdown.

The political gridlock that ended yesterday helped push expectations for the economy to a two-year low in October, according to the Bloomberg Consumer Comfort Index released today. Confidence will rebound, predicts economist Neil Dutta, boding well for the spending that accounts for 70 percent of gross domestic product.

The debt-ceiling deal will probably produce a “relief rally in consumer confidence, the same way we talk about a relief rally in the equity market,” Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York, said in a telephone interview. The Standard & Poor’s 500 Index climbed 0.3 percent today to 1,726 at 12 p.m. in New York, surpassing its previous record close.

Other reports today showed more Americans than forecast filed applications for unemployment benefits last week, and factories in the Philadelphia region expanded more than projected in October.

While a permanent budget agreement has yet to be reached, an improving labor market and a rebound in stocks will probably help households shrug off future Washington squabbles, said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

The compromise funds the government through Jan. 15 and suspends the debt limit until Feb. 7, setting up another round of confrontations then. Any fallout from those negotiations will be blunted as Americans increasingly view elected officials as “The boy who cried wolf,” O’Sullivan said.

Disaster Averted

“We’ve gone through this process a few times now and at the end of the day, disaster was averted,” said O’Sullivan, who is the best consumer-sentiment forecaster over the past two years, according to data compiled by Bloomberg. “People are thinking there’s no wolf there. This is only going to reinforce that.”

Some manufacturers are already looking beyond the fray. The Federal Reserve Bank of Philadelphia’s general economic index fell less than forecast this month, dropping to 19.8 from a more than two-year high of 22.3 in September. The median estimate of economists surveyed by Bloomberg projected a decline to 15. Readings greater than zero signal growth in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware.

The region’s factory managers were the most optimistic about the future in 10 years, today’s report also showed. The outlook index for six months from now increased to 60.8, the highest since September 2003, from 58.2 last month.

Expectations Plunge

The monthly Bloomberg Consumer Comfort Index expectations gauge plunged to minus 31 in October, the lowest level since November 2011, from minus 9 last month. The share of people projecting the economy will worsen jumped by the most since the collapse of Lehman Brothers Holdings Inc. five years ago. The weekly measure of current conditions fell to minus 34.1 in the period ended Oct. 13, the weakest since March.

Nonetheless, households’ reactions so far are less severe than the last time the issue of the debt ceiling flared in mid-2011. Last week’s comfort index compares with a reading of minus 49.1 at the end of August 2011.

Back then, even as the U.S. lost its top credit rating from Standard & Poor’s, no major slowing in spending occurred as confidence climbed in each of the following nine months, said O’Sullivan. The damage done from the most recent shutdown “is not too extreme,” he said.

Easing Concern

That may ease concern among some merchants that the partial government shutdown and talk of default would hurt sales. About 20 percent of the retail industry’s annual sales come during the $600 billion holiday shopping season, and some 42 million Americans work in retail and related careers, according to the National Retail Foundation.

“Whether it’s consumer confidence, employment numbers and now with the issues going on with the government shutdown, it obviously doesn’t do much to build confidence,” James Buettgen, president and chief executive officer at Ruby Tuesday Inc. (RT) said on an Oct. 9 earnings call. “And it’s a little hard to tell where things are going to go until some of that clears up and we see where consumers really are.”

The Maryville, Tennessee-based casual dining chain reported sales at restaurants open at least a year fell 11.4 percent in the three months ended Sept. 3 from the same period in 2012.

Government Assistance

More than half of Matthews, North Carolina-based Family Dollar Stores Inc. (FDO)’s customers are on some sort of government assistance, “so when they hear and read about all this uncertainty, I think it impacts their confidence,” Howard Levine, the company’s chairman and chief executive officer, said on an Oct. 9 earnings call.

The federal government’s delay of the debt-ceiling debate could “increase the amount of anxiety and apprehension,” among retailers ahead of the holiday season, Jack Kleinhenz, chief economist for the Washington-based National Retail Federation, said in an interview. “If business is still uncertain about the direction, that’s going to impact hiring and spending to a degree.”

Not everyone is as optimistic as Dutta and O’Sullivan. A short-term fix to the budget and debt ceiling issues means uncertainty would extend over a longer period of time, producing a greater drag on the economy, John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, wrote in an Oct. 16 note to clients.

Cash Management

The short-term nature of the deal “intimates that the private sector, both households and businesses, will emphasize more cautious cash management over the next three months given the likelihood of yet another contentious political debate,” Silvia said.

The shutdown shaved 0.6 percentage point from annualized fourth-quarter growth, taking $24 billion out of the economy, S&P said in a statement yesterday. In September, the company forecast a growth rate of about 3 percent.

“If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their checkbooks,” S&P said. “That points to another Humbug holiday season.”

One caveat may be that consumers are compartmentalizing their concerns. While they have lost faith the economy will prosper, they are more optimistic about their own situations.

In the Thomson/Reuters University of Michigan consumer sentiment survey, Americans said they expect their incomes will grow by 1.1 percent in the next 12 months, the most in five years, Jonathan Basile, an economist at Credit Suisse in New York, wrote in an Oct. 11 note.

Jobs Matter

Consumers have given a “no-confidence vote on leadership in Washington, but that doesn’t necessarily have a direct impact on what they do with their money,” Basile said in an interview. “Whether you have a job matters, and how much money you have matters.”

Even that’s becoming harder to gauge. Consumers, retailers and investors are all contending with a murkier picture of U.S. economic health amid a dearth of government-supplied economic data due to the shutdown. The Bureau of Labor Statistics didn’t issue September’s jobs report and hasn’t been able to compile and crunch data for October’s release.

Jobless claims decreased by 15,000 to 358,000 in the week ended Oct. 12 from 373,000 in the prior period, according to Labor Department figures issued today. The reading exceeded the 335,000 median estimate of economists surveyed by Bloomberg as a government spokesman said the number of applications in California continued to be elevated as the state worked through a backlog caused by a change in computer systems.

Still, the underlying trends in growth and employment seem constructive, and the eventual elimination of fiscal threats will bolster the consumer, Basile said.

“Those trends are supportive for consumer spending,” he said. “There’s an underlying strength that’s putting a floor under sentiment this time.”

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