Between Confidence and Complacency (Craig Douglass On Consumers)

How close to the edge will you go? And will simply the prospect of falling off the “fiscal cliff” prevent you from holiday shopping?

Preliminary indications show consumer confidence remains positive as the early shopping strategy on Thanksgiving night (Wal-Mart opened at 8 p.m.) expanded traffic and sales, and added a dimension to the traditional Black Friday holiday kick-off. While sales for the new two-day period were significant, Thursday actually cannibalized Friday a bit, as Black Friday sales were off 1.8 percent to $11.2 billion. It’s now more than Black Friday, though, because total sales for the four-day shopping period were up 13 percent over last year. But let’s look at the bigger picture.

As far as Arkansas consumers are concerned, the results of not addressing fiscal matters in Washington most likely center on the taxes that would be increased. On Jan. 1, if nothing is done, the Bush-era tax cuts will expire, meaning the average family will be facing in 2013 a tax increase of $2,200. Further, payroll taxes that contribute to such programs as Social Security and Medicare will increase, leaving working individuals with less take-home pay and less disposable income (total personal income, minus taxes). The overall tax-related increases could exceed $3,000 annually.

Beginning next year, if no changes are agreed to by the president and Congress, the six federal tax-bracket rates of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent will change to five rates of 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent. A real precipice? Or a fair sharing? As one cable news channel promotes, “We report. You decide.”

Of course, the whole mess is not just about taxes. It also includes significant government spending cuts, spending that supports jobs. In fact, if all of the tax increases and spending cuts were to take effect, the non-partisan Congressional Budget Office reports, the Gross Domestic Product would contract between 3 percent and 4 percent, and that technically would put the country back into a recession.

So the realities of the big picture as far as 2013 is concerned appear to be clear. But what does it mean to consumer confidence now? And how does that confidence translate into consumer spending during the remaining holiday period, a time when retailers traditionally see upward of 25 percent to 30 percent of their total annual sales?

Consumer confidence has been soaring. In mid-November, the Michigan Consumer Sentiment Report showed positive feelings about the economy and one’s own economic situation increased to 84.9. The previous report was 82.6. Be aware, however, because this euphoria has been misplaced before. Taking a look back, consumer confidence is the best it has been since July 2007, one month before early signs of the Great Recession were seen, the stock market began its retreat and the housing bubble burst.

In October, retail sales dropped 0.3 percent, while sales had been gaining during the previous three-month period. There is no doubt super storm Sandy had something to do with sales decreases in the East, including a drop in auto sales. But we must figure in a palpable anxiousness from consumers due to the lack of certainty over the impact the fiscal cliff will have on purchasing power in particular and the economy in general. And in corporate headquarters, lack of certainty is one of the greatest drags on hiring, increasing pay and investing, as business cash prefers to sit on the sidelines until more is known about fiscal policy, widely understood as government taxing and spending. Add to this the uncertainty of the presidential election and the voter-driven direction of the country, on which consumers and business leaders no doubt were also focusing. At least that piece of the puzzle has now been put into place.

The drop in October retail sales may be only a temporary setback, due to weather-related and politically infused circumstances. The real test will come in the next three weeks as consumers’ certain desire to spend is tempered by uncertainty in Washington.

Craig Douglass is a Little Rock-based advertising agency owner and marketing and research consultant. He is president of Craig Douglass Communications Inc.