Debt Ceiling Standoff Hurts Consumer Confidence, Goldman Economist Says

Washington is struggling to reach a deal on the debt ceiling, and American consumer confidence is slipping. Do these facts have anything to do with each other?

Andrew Tilton, an economist at Goldman Sachs, thinks so. In a note published Tuesday, Tilton wrote that a recent drop in the Reuters/University of Michigan Consumer Sentiment Index -- a closely watched consumer confidence report -- could be related to the ongoing debt ceiling gridlock.

The Michigan index fell in July from 71.5 points to 63.8 points -- a two-year low, Reuters noted. The drop took many by surprise -- the index was expected to rise slightly in July, according to economists polled by Bloomberg News.

Nor is Michigan the only polling body to find waning consumer confidence this summer.

In June, a Gallup poll found that confidence was at a near-low point for the year after dropping nine points in the early part of the month. Around the same time, the Conference Board, which publishes the monthly Consumer Confidence Index, another major survey of consumer sentiment, measured a 3.2 point decline in consumer confidence for June.

Tilton, the Goldman economist, wrote that the consumer confidence plunge happened around the same time as “an explosion of media coverage” of the debt ceiling standoff in June and July. For him, the coincidence is suggestive.

“While it's certainly possible that the drop in confidence reflects other factors... the extent, timing, and composition suggests that the uncertainty surrounding the debt ceiling is probably a contributing factor,” Tilton wrote.

He’s not the first to suggest a relationship between flagging confidence and the debt ceiling negotiations. Last Friday, Bank of America economist Joshua Dennerlein also attributed the drop in the Reuters/University of Michigan index to the debt debate, as noted by the Associated Press. And Ward McCarthy, chief financial economist at Jefferies & Co., made a similar statement to Reuters.

Yet numerous polls this summer have shown that Americans are more concerned with the health of the economy and the sluggish job market than with anything related to the federal budget deficit.

A Gallup poll published this week found that the deficit came in third, behind the economy and unemployment, on a list of Americans’ greatest worries. A CBS/New York Times poll in late June found that 53 percent of respondents were most concerned about the economy and jobs, compared with only 7 percent who were most concerned about the deficit.

Of course, consumers don’t make their choices in a vacuum. Holly Wade, a senior policy analyst at the National Federation of Independent Businesses, and one of the producers of the monthly Small Business Economic Trends survey, told The Huffington Post that “political climate” is the second-most cited concern for small business owners.

“Their first and foremost concern is a stable economy,” Wade said. “Then they can look forward to see how business conditions can go from there. Without some stability in D.C., everything continues to be up in the air.”

Wade said that she believes the debt ceiling standoff “contributes to the problem” of falling confidence. But she noted that consumer sentiment among small business owners had already started to decline around February or March, well before the “explosion of media coverage” that Tilton’s report cites.

Ken Goldstein, an economist at the Conference Board, dismissed the idea that debt ceiling anxieties are to blame for faltering confidence.

Goldstein told The Huffington Post that for the average American, the debt ceiling debate “is both too esoteric and takes time away from figuring out who’s going to be on next week’s 'Survivor.'”

The recent drop in consumer confidence probably has more to do with the ailing jobs market -- as demonstrated in June's underwhelming employment report -- than “the kabuki in D.C.,” Goldstein said.

“After a lousy May, we only got 18,000 jobs in June,” he told The Huffington Post. “I suspect that trumps everything else that happens.”

As of Wednesday, President Obama had signaled that he was willing to consider a short-term extension to the debt limit, but that Congress needed to agree on a way forward on a long-term solution. The bipartisan coalition of senators known as Gang of Six spent the day making the case for their $3.7 trillion deficit reduction plan on the Hill, Politico reported.