U.S. consumer confidence took a dive this month, wiping out all the gains of 2012, a drop fueled by the expiration of the 2 percentage point cut in payroll taxes, the Conference Board reported Tuesday.
The tax increase took effect on Jan. 1, and though long expected in Washington, it appeared to take consumers by surprise. It was included in the $650 billion "fiscal cliff" tax package passed by Congress in the early morning hours on New Year's Day. The bill was dubbed by the media as a "tax hike on the rich," but the payroll tax provision hit the paychecks of primarily middle- and low-income consumers.
"The increase in the payroll tax has undoubtedly dampened consumers' spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock," said Lynn Franco, economist at the Conference Board.
The index fell to 58.6 from 66.7 in December. Confidence also slumped in December as Congress and the White House battled over the tax package, spoiling what started out to be a strong Christmas spending season.
In the end, as the din from Washington over the budget and taxes crescendoed in the weeks surrounding Christmas and New Year's Day, consumers withdrew from the malls and the shopping season had a weak finish.
The National Retail Federation said spending rose by only 3 percent during the holidays -- an uninspiring performance.
"The holiday season went head-to-head with Washington's political wrangling over fiscal concerns, shifting consumers' spending plans downward," said NRF President Matthew Shays.
Mr. Shays said the consumer slump is likely to continue into this year, since the battle over taxes and spending was not resolved at year-end, with Congress postponing the deadline for $100 billion in spending cuts until March.
"What we witnessed during the holiday season is an indication of what we are likely to see in 2013. Consumers read troubling economic headlines every day and look at their bottom lines at the end of the month, and they don't like what they see," he said.
"Pushing fiscal policy decisions down the road will lead to even greater uncertainty, and will continue to impact consumers' desire and ability to spend on discretionary items. The administration and Congress need to pursue and enact policies that lead to growth and economic expansion, or it could be another challenging year for retailers and consumers alike."
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