Stock Market Up, Consumer Confidence Down

Budget battles in Washington are bumming out consumers.

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The bipolar economy continues to move in two directions at once.

The stock market is drifting toward new highs and the housing market is clearly recovering. Yet consumer confidence has now receded to the lowest reading since late 2011. The big question is which direction—up or down—the overall economy is headed.

Confidence, as measured by the Conference Board, has now fallen for three months in a row, a sign that recent developments in Washington are rattling consumers. The fiscal cliff deal Congress passed at the start of the year temporarily eased a big worry about a bunch of spending cuts and tax hikes going into effect all at once, but Americans seem skeptical that it truly solved much of anything.

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For one thing, a temporary payroll tax cut that had been in effect since 2009 ended, cutting the average worker's take-home pay by about $80 per month or $1,000 per year. People clearly noticed the smaller paychecks, probably the main reason that expectations for future income plunged to the lowest level since early 2009, which was the deepest point in the recession.

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The tax hikes on higher earners that were included in the fiscal cliff deal took a toll on the Conference Board survey as well, which showed a bigger decline in confidence among higher-income households. And it surely doesn't help that more Washington budget battles are on the way, including March deadlines for delayed spending cuts, a possible government shutdown, and the federal borrowing limit needing to be raised a couple months after that.

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The big drop in confidence—which was considerably worse than economists expected—raises the risk that consumers will pull back on spending in 2013, which could pull economic growth even lower than the anemic 1.5 percent that economists predict for this year's GDP. Businesses have been reluctant to spend, too, suggesting the threat of a double whammy.

Housing remains a bright spot, however, with the percentage of respondents to the survey saying they plan to buy a home holding steady. Low prices, low interest rates, the improving availability of credit and relatively stable job security are finally luring buyers and generating sales. Unless there's an unforeseen calamity, that seems likely to continue.

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The outlook for the stock market is murkier. The strong performance during the last year is finally luring investors who have been sitting on the sidelines, afraid to take risks with their money. But if investor enthusiasm exceeds real economic gains, stocks could flatline for a while. Bank of America Merrill Lynch, for instance, predicts there will be a spring correction in the stock market—a 5 to 10 percent decline—before stocks resume their upward climb.

Most economists think the second half of 2013 will be better than the first, since consumers will have adjusted to the recent tax increases by then, and other hurdles in Washington might be behind us. That is, unless Washington erects new hurdles for the economy to jump over.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.