Consumers Are Shrugging Off the 'Fiscal Cliff'

Everybody in America seems to be stressed out about the looming "fiscal cliff" -- except for the people who spend most of the money in America.

One of the oddities of the whole dramatic walk up to the cliff is that business leaders, politicians, economists and the media are apoplectic about it, since the economy would tank if all of the forthcoming tax hikes and spending cuts go into effect as scheduled at the start of 2013. But ordinary consumers don't seem to be bothered at all. Not yet, anyway.

[ENJOY: Political Cartoons on the Fiscal Cliff]

The dichotomy shows up clearly in the numbers. The stock market has drifted down since September, as investors settle onto the sidelines to wait out the volatility that's expected as cliff negotiations reach a climax. Business investment is down sharply, and CEOs have made clear over recent months that they won't be comfortable spending until they get more clarity about what's going to happen in Washington. By some measures, such as new orders by manufacturers,, business activity has even contracted to recessionary levels.

Consumers don't seem to care, however. So far, they've spent vigorously on holiday shopping, with forecasting firm IHS Global Insight predicting that holiday sales will rise a healthy 4 percent or so from last year. Car sales recently hit the highest levels in four years. Confidence measures have risen to surprisingly high levels over the last few months, and more or less stayed there. Gallup's index of economic confidence, for example, recently hit the highest level in the four years Gallup has been measuring it.

[RELATED: How Much Will the Fiscal Cliff Cost You?]

So why are consumers so buoyant? It might be a two-word answer: Housing recovery. "People don't really understand the fiscal cliff," says Russell Price, senior economist for investing firm Ameriprise. "But they're very aware that the value of their home is rising. They feel relief that housing is starting to recover." That's true, he says, even for home owners with no intention of buying or selling property, because they pay close attention to what happens when friends or family members sell or purchase real estate.

If home owners sense a housing recovery, they're right. By most measures, home prices bottomed out earlier this year, after a housing bust that lasted nearly six years. Federal Reserve data shows that the total value of residential real estate fell by nearly $9 trillion from 2006 to 2011, but began to recover in 2012, bouncing back by about $700 billion in the first half of the year. Home owners are still in a hole, compared with the peak of the housing bubble, but they've also paid down debt, cut spending and made other adjustments that offset some of the loss. Lower interest rate have helped too, making mortgages and other debt more affordable.

[NEWMAN: The Right Way to Resolve the Fiscal Cliff]

It's logical that a rebound in home prices would boost consumer confidence, since the "wealth effect" makes people feel better when their net worth rises, even if it's only on paper. This is a big part of what the Fed's controversial quantitative easing policy has been meant to accomplish. By pushing interest rates to record lows, the Fed has helped make homes more affordable than ever and started to motivate buyers. It's taken longer than anybody would have wanted, but as more buyers materialize, that too helps boost home prices and generate more economic activity.

It's a big economy, and a housing recovery isn't the only reason consumers are starting to feel better. Job security is improving, gas prices have been falling, and wages have been inching up as well. It's still possible that the fiscal-cliff negotiations could unravel, derailing the halting economic recovery and puncturing consumer confidence the same way the debt-ceiling standoff did in 2011. But many economists think that if Washington politicians could settle their difference, 2013 could be a banner year for the economy. Upbeat consumers might be onto something.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.



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