Double Dip Recession Coming? Consumer Confidence Falls, Foreshadows GDP Drop

While Wall Street Insiders are acting shocked by the news the U.S. economy shrank by 0.1% in the fourth quarter of 2012, I don’t think Main Street is all that surprised. Perhaps it is time Wall Street begins paying attention to Main Street whose consumer confidence index this week dropped by its widest margin month-to-month since August of 2011.

The Conference Board’s index decreased to 58.6 as released this week and actually saw December’s number revised down to 66.7. It was the worst reading by American consumers since November 2011.

With American consumers making up basically 70% of all GDP, this was not a result which supports Wall Street’s growth estimates for the first quarter. The January reading was lower than the most pessimistic forecast in a Bloomberg survey, which had a median estimate of 64.

“The thing that’s particularly troubling is the sizable decline in expectations,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who projected a reading of 61.6. "As those expectations deteriorate, it doesn’t bode particularly well for day-to-day consumer spending."

Most of the United States fortunate enough to be earning a paycheck realize we simply don’t have as much to spend as we did the past two years. According to the Tax Policy Center, the American Taxpayer Relief Act will mean that the average federal effective tax rate will be 21.7% and the average tax increase $1,257.

Moreover, all Americans who make less that $500,000 per year will see an increase of 1% to 1.4% in their annual effective tax rate as a result of the payroll tax rise. The effective tax rate of people who make more than $1,000,000 per year should rise by an average of 5.2%. In 2013 Americans are expected to pay in federal taxes roughly $205 billion more than they did in 2012.

The ironic part of today’s news is, fourth quarter GDP would have decreased even more significantly had it not been for U.S. consumer spending increases which surpassed expectations. Consumer spending rose 2.2% in the fourth quarter.

The even more ironic part of the report on GDP was, you can’t blame business for the decrease. After a major surge of inventory spending leading up to the holiday season during the third quarter, total business investment surged by 12.5% in the fourth quarter as companies spent on capital goods such as computers and trucks and machinery. That fact is great news for our beleaguered manufacturing sector.

So you might be asking yourself, if consumers increased their spending as did business, how did GDP slip into the red? The answer of course is, that the federal government continues to get caught with their hands in the cookie jar.

Forget the fact that during the three official revisions of the third quarter GDP it kept going up from an original estimate of 2% to a now final calculation of 3.4%. Even the federal government could not cover up the that fact over half that growth came directly from accelerating defense contract purchases.

But what goes up for no good reason must come down. During the third quarter, defense spending jumped by 13%. Back in October, BNP Paribas chief economist Julia Coronado likened that surge to a “use it or lose” mentality within the Pentagon. Looks like they just used it before October: After surging from $807 billion to $834 billion in the third quarter, the annual rate of defense spending crashed to $787 billion in the fourth quarter.

Basically that $50 billion swing in spending was enough to turn 3.4% growth in GDP negative from one quarter to another. So is this the beginning of the long anticipated double-dip recession? Only time and congressional action will tell.

GDP is beginning the year short $200 billion, which could have been spent ore invested by consumers, but was collected in combined federal taxes. That means effectively each quarter this year will be short a similar $50 billion which was enough to turn fourth quarter GDP red from the third quarter.

Secondly, failing to resolve the sequester, which was punted down the road until at least March, could divert another couple hundred billion from the economy. We could be looking at a combined impact of pulling $500 billion out of our $16 trillion GDP this year which would represent a 3.125 decline all but assuring the U.S. slips into recession.

There is a very legitimate reason consumer confidence hit a three year low this month. Main Street sees a double-dip recession as a real possibility. Americans know they can’t spend what they don’t have. They also realize what Washington refuses to admit, the federal government is broke in no condition to bailout anyone