Economic data on U.S. capital goods orders, shipments, and outlays for business structures over the past three months have weakened markedly compared to the pace of the past three years.  Three months is a short period for measuring U.S. economic performance, but given a very high level of profitability and no marked slowing in demand, the declines look suspiciously like a deliberate pulling back that might best be explained by unusually severe policy uncertainty, or specifically the Fiscal Cliff. However, the spending public, it would seem, remains fairly far removed from the fiscal deliberations of financial markets, with recent consumer confidence measures improving, in contrast to a recent pullback in business confidence (see below).

It seems possible that the economic slowdown in much of the world and policy uncertainties elsewhere could be playing a larger role in business sentiment, with recent declines somewhat more centered on large, global firms than the U.S. small business sector (see below). Among other factors, financial markets seem to strongly expect a fiscal deal, with positive spillovers in equity markets, and thus the financial wellbeing of consumers.

Notably, it is possible for consumers to take note of politics and policy risks, as the deep declines in confidence in the third quarter 2011 - in close proximity to the debt ceiling fracas - show.  But it also important to note that actual consumer spending didn’t miss a beat during that period (see below).  Had the drama played out in a way that produced an actual shock to the economy (even one well short of U.S. Treasury default), fear would have become reality. 

To avoid getting too technical when considering the fiscal cliff impact before 2012 is out, note the critical period in December. The public has become accustomed to high drama and last minute fiscal deals.  If a hard deal is struck to mitigate the fiscal cliff, it should likely be expected in late December. Holiday merchandise sales are heavily weighted to December. Unadjusted data shows monthly GAFO sales in recent years have been about 10% above the full year average in November and 47% above full year averages in December. According to retailer anecdotes and some industry data, there are still heavy weights in sales during the final two weeks of the year, including the period shortly before the Christmas holiday.  Sales in this short period could account for about one fourth or more of total holiday merchandise sales.  While “no deal” before key members of Congress leave for the holidays would not preclude a deal under pressure before the year is out, it is conceivable that news flow around the cliff issue and consumer concerns would be heavily weighted to that critical period for spending.