So far, most of the concern surrounding the looming threat-billions of dollars of tax increases and federal spending cuts set to take effect at the end of the year-has focused on businesses.
But while pundits in Washington and Wall Street rail against the impending calamity, most consumers just aren’t paying attention, Tom Porcelli, Royal Bank of Canada’s chief U.S. economist told The Wall Street Journal.
In fact, they seem to be blissfully unaware.
“Not until it makes it into the Rockland Journal News will my parents really understand about the fiscal cliff,” Porcelli said. “Even if someone can acknowledge some familiarity with the topic, they probably don’t know the details.”
And that could mean troubled household finances in 2013 – especially with what this recent spending data has shown us.
Pre-Fiscal Cliff Spending Spree
In a sign that many consumers aren’t worried about saving, Americans have been stepping up their purchases lately.
Americans spent more money at retailers in September – a buying surge that reflected growing consumer confidence and the launch of Apple Inc.’s (NASDAQ:AAPL) iPhone 5.
Retail sales jumped 1.1% last month, marking the best two months of sales in two years, according to figures released by the Commerce Department.
Even better, the buying binge was wide-spread as retailers saw gains in almost every major category.
Sales of electronics and appliances vaulted higher by 4.5%, in part because of iPhone 5 sales. Building materials, home furnishings, garden supplies and clothing sales all posted gains.
What’s more, the University of Michigan’s monthly survey of consumer confidence jumped to 83.1 in October. That’s up from 78.3 in September – the highest level since September 2007 – three months before the start of the Great Recession.
Americans are also spending more on big-ticket items.
U.S. auto companies reported that sales rose 13% in September from a year earlier to nearly 1.2 million. Analysts think sales could hit 14.3 million this year, up from 12.8 million last year.
The housing market is also roaring back, boosting home prices and the “wealth effect”-making Americans feel better about spending more.
“The consumer is back,” Joel Naroff, chief economist at Naroff Economic Advisors told CBS News.“They are not spending money like it is going out of style…they are spending at a more normal pace that is consistent with a moderately growing economy.”
But while consumers are ready to party, American companies are raising these warning flags.
Fiscal Cliff Dark Clouds Ahead
Companies have been warning for months that they will have to slow spending and cut jobs if Congress and the president don’t act soon to avert the impending disaster.
And now, a few dark clouds are on the horizon.
Wind-turbine manufacturer Vestas Wind Systems AS (ADR PINK: VWARY) recently laid off 500 workers in Colorado, citing the looming expiration of the production-tax credit (PTC).
“Failure to extend the PTC could damage U.S. competitiveness in the renewable-energy sector,” Sarah Cottrell Propst, executive director of the Interwest Energy Alliance told the Denver Post.
Navigant Consulting Inc. (NYSE:NCI) has predicted the wind-power industry could lose about half of its U.S. jobs – 37,000 out of 75,000 – if the PTC is not extended
And there’s more.
CSX Corp. (NYSE:CSX) Chief Executive Michael Ward last week told Fox Business uncertainty over the cliff has been a big factor in a slowdown in his railroad’s freight volumes.
The railroad’s volume slipped 1.2% in the third quarter and 0.4% in the second quarter.
Railroads are seen as economic bellwethers because of the wide variety of goods that they ship.
Investing Against the Fiscal Cliff
For now, more Americans may be focused on the election or the job market than the ins- and-outs of economics. But if Washington fails to avert the fiscal cliff, consumers – and investors — are in for a hard landing.
How should investors protect themselves?
Blackrock Inc. (NYSE:BLK) points to municipal bonds and large-cap multinationals as potential safe ports in a fiscal-cliff storm.
Tax-free munis offer relief from higher tax rates, and large global businesses can leverage overseas operations to offset sluggish U.S. growth.
Investors could look at the PowerShares Insured National Municipal Bond Portfolio (NYSEARCA:PZA) or the Market Vectors Intermediate Municipal ETF (NYSEARCA:ITM) for muni bond exposure, or look for a muni fund dedicated to the state they live in to avoid both federal and state taxes.
The iShares S&P 500 Growth Index Fund (NYSEARCA:IVW) and the Vanguard Mega-Cap 300 ETF (NYSEARCA:MGC) focus on the large caps with international exposure. Both offer low expense and P/E ratios along with ample liquidity and dividends.
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