S&P's Economic Update: The Tax Man Blahs

SP Capital IQ |

Beth Ann Bovino, the Deputy Chief Economist at Standard & Poor’s notes that while recent policy actions suggests the U.S. government is more willing to compromise than we earlier thought, which helps reduce the risk of a recession over the next twelve months, the recent tax increases largely explains why consumer confidence fell to its lowest rate in over a year, and that it will likely weigh a bit on people’s willingness to open their pocket books over the next few months.

U.S policy makers didn’t slow down on legislation action last week.  Maybe in response to the Senate’s move to push through legislation before the Jan. 1 sequester, the House of Representatives voted to suspend the nation’s statutory borrowing limit until May 19.  This gives policy makers more time to resolve our long-term debt issues, before the need for the Treasury to take extraordinary measures.  But that doesn’t mean we’re happy about it.  Consumer confidence fell to its lowest rate in over a year, as news of more taxes weighed on people’s moods.

I guess the real question here, is why are we surprised that people were down in January?

It’s hard to find many people happy to pay more taxes to Uncle Sam, and we believe news of more taxes largely explains the near 8 point drop to 58.6 which was reported for the Conference Board’s consumer confidence index in January.  It was still weaker than expected and came after worries of government dysfunction pushed the index down by almost 5 points in December.

Though recent policy actions suggest a government that is more willing to compromise than we earlier thought, which helps reduce the risk of a recession over the next twelve months, it still hurts, and will likely weigh a bit on people’s willingness to open their pocket books over the next few months. Indeed, we expect to see income and spending data to show large tax-driven gyrations over the next few months, with special dividends and early bonus payments seen in December, followed by a reversal with an added payroll tax hit in January.

In other news, we did see a nice bounce in durable orders, which climbed a much stronger than expected 4.6% in December.  It was much stronger than expected by consensus and is now up in seven of the last 8 months.  That’s good news.  It provides support to fourth quarter growth, helping to offset some of the damage to growth from Hurricane Sandy.

We also saw more good news from the housing sector.  New home sales fell over 7% to an annual rate of 369,000 units in December.  If you were wondering, that’s not the good news. The good news was that it came after sharp upward revisions the prior three months erased the December drop.  We also home prices climb 5.5% over last November, according to the S&P Case-Shiller 20-city home price index.  That’s the strongest gain since August 2006.  While the drop in December’s pending home sales index suggest some weakness in January, we believe the long-term trend remains strong.

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