Consumer confidence plunged sharply in December thanks to the political drama unfolding in the nation's capital.
The falling confidence, reported Thursday in the Conference Board's monthly index of consumer sentiment, is a clear sign that the ongoing partisan wrangling in Washington over the approaching fiscal cliff is having direct economic consequences.
But within the survey of consumer confidence, there are signs of an ongoing recovery, with fewer participants reporting worsening conditions and more citing improvement.
That was supported Thursday by positive housing and employment data. First-time claims for jobless benefits fell by 12,000 to 350,000, and to a four-week average of 356,750. That's the lowest four-week average since March 2008, several months before the near-meltdown of the U.S. financial system.
"The labor market is holding together despite lingering concerns over the fate of the fiscal cliff," Neil Dutta, head of U.S. economics for forecaster Renaissance Macro, said in a research note.
In another positive sign, sales of new single-family homes climbed by 4.4 percent in November from October, the Commerce Department said, to the highest level since April 2010. New home sales are up 15.3 percent above November 2011.
Still, sales data and jobless claims look backward, whereas the confidence measure is an indicator of future bumps in the road for the economy. The Conference Board's consumer confidence index declined by a larger-than-expected margin, falling from November's reading of 71.5 to 65.1 in December. The drop is almost entirely caused by weaker consumer expectations.
"The sudden turnaround in expectations was most likely caused by uncertainty surrounding the oncoming fiscal cliff," Lynn Franco, the group's director of economic indicators, said in a statement accompanying the monthly report. "A similar decline in expectations was experienced in August of 2011 during the debt ceiling discussions."
Those talks in 2011 dragged on for eight months, resulting in an embarrassing downgrade of the U.S government's creditworthiness and slowing both growth and hiring.
Economists fear the same could happen again if Congress remains tied up in knots and unable to reach a deal before Tuesday on tax increases, spending cuts and an agreement to raise the nation's debt ceiling.
"The December consumer confidence report underscores the themes for the economy and the fiscal cliff that we have been discussing ad nauseum in recent weeks," wrote economists at forecaster RDQ Economics, in a note to investors that pointed to other upbeat economic indicators. "However, in contrast to the improvement in current conditions, expectations plunged, which likely reflects growing awareness of the fiscal cliff and Washington's dysfunctional behavior toward resolving it."
Added Chris Christopher, an economist with forecaster IHS Global Insight, in a research note: "Since the end of summer, consumer confidence was on the move and reached relatively elevated levels. Confidence started to slow in November and then took a dramatic hit in December."
The fiscal cliff is already blamed for weaker than projected holiday sales, which are better than in 2011 but appear to be falling short of expectations. Economists think consumers played it safe this season, worried that the fiscal cliff mess threatens their jobs and could send their taxes up. The eroding confidence also suggests a tough month for retailers.
"This is a bad report, since December is an important month for retailers. With more Americans worried about what is in store for them around the corner, they are prone to be more cautious on the spending front," Christopher of IHS wrote. "To sum up - the fiscal cliff is the Grinch that stole consumer cheer this year. Bad timing, indeed."
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