Consumers Not Spooked by the Sequester

Sequestration cuts aren't spooking consumers...yet.

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In what's akin to a tired rerun of a bad soap opera, Congress and President Barack Obama were once again unable to come to a middle ground Friday as $85 billion of automatic spending cuts known as sequestration loom, set to kick in at midnight tonight.

Historically, such political discord would negatively impact consumer sentiment. But despite all the wrangling on Capitol Hill, consumers barely batted an eye watching the latest episode of a very predictable drama unfold between congressional Republicans and the White House.

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After taking a serious hit in December, consumer confidence actually rose more than expected in February to reach its highest point since November 2012, according to the Reuters/Unviersity of Michigan Consumers Sentiment index. The index climbed to 77.6 from 73.8 in January, significantly surpassing estimates of 76.3.

"Many Americans are tired of the political wrangling and bickering, so the sequester is not a big ordeal for them since a certain level of political crisis fatigue has set in," Chris Christopher, economist at financial analytics firm IHS Global Insight, wrote in a report Friday.

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In other words, Americans have seen this episode of political brinksmanship before in the Standard & Poor's downgrade of U.S. debt and the debt ceiling crisis in the summer of 2011. More recently, negotiations technically failed to avert the fiscal cliff, while Americans watched yet another reprise of debt ceiling squabbles in January.

"The shock value at this point is minimal," Christopher added.

Rising consumer confidence and an improving labor market bodes well for consumer spending, the largest driver of the U.S. economy. Despite the dark shadow cast by the looming sequester cuts, the economy saw 157,000 new jobs added in January, according to the Labor Department.

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Experts say an improving labor market coupled with the sustained rise in home prices seen recently could be enough to offset the impact of the sequester and spur Americans to pry open their pocketbooks to spend.

Still, higher taxes thanks to the end of the payroll tax holiday takes a big bite out of take-home pay, which could ultimately constrain spending and harm the broader economy. The recent rise in prices at the gas pump could also cause consumers to clam up at the cash register.

"One thing is perfectly clear—most Americans will remain cautious in their spending habits," Christopher said.