Consumer Sentiment Plunges on Fears of Fiscal Cliff

Updated July 2026

The Thomson Reuters/University of Michigan’s initial reading of the overall index for consumer sentiment unexpectedly fell to 74.5 percent in early December, as the negotiations about the fiscal cliff have dominated the news. This reading of consumer confidence was the lowest level for the index since August of this year.

Reuters had polled leading economists before the report was released and their median forecast was 82.4. This was just slightly below November’s figure of 82.7. The American consumer’s outlook for the economy and their own finances was surprisingly weak. Richard Curtin, survey director gave this explanation: “Confidence plunged in early December as consumers confronted the rising likelihood that political gridlock would push the country over the fiscal cliff.”

Of course Curtin was referring to concerns held by the public of possible economic contraction, or even recession in 2013 in the event that the White House and Congress are unable to resolve the budget conflict now playing out in Washington DC. A Gallup survey taken around the same time found that 64% of Americans believe the fiscal cliff measures would harm their own personal financial situation, according to Gallup’s 2012 polling. That number helps explain why the Michigan survey’s headline figure fell so far short of what Wall Street economists expected.

The “fiscal cliff” refers to automatic spending cuts, along with tax hikes that are valued at $600 billion in the event that US political leaders are unable to reach agreement to remove the threat. According to the Council on Foreign Relations, the combined measures would slash the federal budget deficit by $503 billion between FY 2012 and FY 2013 under Congressional Budget Office projections, equal to roughly 4 percent of GDP in contraction during calendar year 2013. The same CFR analysis projects real U.S. economic output would decline by 0.5 percent from the fourth quarter of 2012 to the fourth quarter of 2013 if the full cliff takes effect, with unemployment climbing to over 9 percent. Separately, the Committee for a Responsible Federal Budget estimates the economic hit at $550 billion using CBO multipliers, also equivalent to about two percent of GDP. Many economists believe the fiscal cliff is likely to put the US economy back into a recession.

How the Fiscal Cliff Numbers Compare

The projections vary by source and methodology, but they point in the same direction: a sharp, self-inflicted drag on growth. The table below lines up the key figures cited by policy analysts in December 2012.

Another measure of the Thomson Reuters/University of Michigan’s survey on the outlook of the economy is that of current economic conditions. In November, the final reading was 90.7; the early December report saw that measure slip to 89.9. Economists surveyed by Reuters had forecast a healthier reading of 91.

Another measurement of the survey is consumer expectations, which too fell to its lowest level in four months, recording a 64.6. This number was far less than the 77.6 at the end of November and far short of the consensus number of 78.

The survey also measures consumers’ 12-month outlook, which also fell in early December by 22 points from the end of November. The survey recorded a 75, the lowest it has been since August.

Finally, consumers expect inflation to rise 3.3 percent in the coming year, and the 5 to 10 year inflation outlook reported by the survey notched up 1/10 of a percent to 2.9 percent. Inflation expectations like these matter to the Federal Reserve as it weighs monetary policy heading into 2013, since a spike in expected inflation combined with a stalled economy would leave policymakers with fewer good options.

What Consumers Told Pollsters

Richard Curtin’s comments went beyond the single line released with the headline number. In a fuller statement reported by the Los Angeles Times, he warned that damage to household confidence would linger well past any last-minute deal in Washington.

Curtin also pointed to something less measurable than an index reading: the political blame game itself. He suggested that voters aren’t just reacting to spending cuts and tax hikes on paper, they’re reacting to the process that produced the standoff in the first place.

Why Wall Street Shrugged While Consumers Worried

When the report was first released, the stock market fell. However, it soon regained the territory that it lost. It seems that Wall Street is more confident that Washington budget talks will end successfully before 2013. Consumers, on the other hand, seem very wary of the uncertainty in their future.

That gap between trader psychology and household psychology isn’t unusual during a policy standoff. Institutional investors tend to price in a last-minute deal because that’s what history suggests happens; households, meanwhile, feel the uncertainty in more immediate terms, worrying about paychecks, retirement account balances, and whether a tax hike will show up in their January withholding. Financial planners at firms ranging from major banks to independent advisors were fielding client questions in December 2012 about whether to adjust withholding, accelerate income, or delay bonuses ahead of possible rate changes. Those are the kinds of decisions that show up in a sentiment survey well before they show up in GDP data.

What This Means for Household Finances

Households watching this debate should focus on the levers they actually control. That means checking whether a household budget can absorb a payroll tax reversion, reviewing whether an emergency fund covers three to six months of expenses, and understanding how a rate change might affect variable-rate debt. A Consumer Financial Protection Bureau review of a household’s monthly obligations, including a realistic debt-to-income (DTI) calculation, is a reasonable starting point for anyone unsure how exposed their budget is to a sudden tax increase. Lenders looking at mortgage or auto loan applications in this period were also paying close attention to applicants’ FICO Scores and DTI ratios, since economic uncertainty tends to tighten underwriting standards even before a recession officially arrives.

For a concrete example: if a household earns $65,000 annually and pays $3,000 in federal income taxes, a 2% tax hike on the top 1% of earners (which was part of the fiscal cliff debate) would raise their tax bill by $130 per year. That’s roughly $11 per month. But if payroll taxes revert to pre-2011 levels, a 2% cut, the average worker could see a $10 reduction in take-home pay each month. On a $3,000 annual tax bill, that’s a $60 annual increase in taxes if the payroll tax is reinstated. The psychological weight of that shift, even when small, compounds when the economy is weak.

If you have a 620 credit score and need about $8,000 for a car loan, this climate makes borrowing harder. Lenders in December 2012 were already tightening standards. A 620 score falls into the subprime range. You may qualify for a loan, but only at a higher rate, perhaps 6.5% to 7.5%. With a $8,000 loan, that’s $520 to $600 more in interest over five years than someone with a 720 score. The fiscal cliff’s uncertainty meant that even borrowers with decent scores might face sharper scrutiny.

One downside: this advice assumes a stable financial base. If your emergency fund is less than three months’ worth of expenses, or if your debt-to-income ratio is already above 40%, then delaying major purchases or refinancing decisions might be the wiser move. Trying to adjust your budget in this environment without a cushion can backfire. The recommendation works best for those with some financial flexibility. For people already stretched thin, focusing on survival, paying essential bills, avoiding new debt, is more urgent than planning for fiscal cliff scenarios.

Frequently Asked Questions

What is the fiscal cliff?

The fiscal cliff refers to a combination of automatic spending cuts and tax hikes, valued at roughly $600 billion, that were set to take effect if Congress and the White House failed to reach a budget agreement by the end of 2012.

Why did consumer sentiment fall so sharply in December 2012?

The Thomson Reuters/University of Michigan index fell to 74.5, its lowest since August, as households reacted to gridlock in Washington over the fiscal cliff negotiations. Economists had expected a much smaller decline, forecasting 82.4.

How many Americans thought the fiscal cliff would hurt their own finances?

According to Gallup, 64% of Americans believed the fiscal cliff measures would harm their personal financial situation, reflecting broad anxiety beyond the stock market’s relatively calm reaction.

How much would the fiscal cliff reduce the deficit?

The Congressional Budget Office projected the combined tax and spending measures would cut the federal deficit by $503 billion between FY 2012 and FY 2013, according to the Council on Foreign Relations.

Would the fiscal cliff cause a recession?

Many economists warned it could. The Council on Foreign Relations projected real output would fall 0.5 percent from Q4 2012 to Q4 2013 under the full fiscal cliff scenario, with unemployment rising above 9 percent.

How does the fiscal cliff compare to other estimates of economic damage?

The Committee for a Responsible Federal Budget separately estimated the hit at $550 billion, or about two percent of GDP, using CBO multipliers, a figure broadly consistent with CFR’s four percent of GDP contraction estimate for the full package.

What did the University of Michigan survey measure besides overall sentiment?

The survey also tracks current economic conditions, consumer expectations, and a 12-month economic outlook. All three components fell in early December 2012, with the 12-month outlook dropping 22 points to 75.

Did inflation expectations change during this period?

Yes. Consumers expected inflation to rise 3.3 percent over the coming year, while the longer-term 5 to 10 year inflation outlook ticked up slightly to 2.9 percent.

Why did the stock market recover after initially falling on the report?

Investors appeared to bet that Washington would ultimately reach a deal before the deadline, even as household sentiment stayed weak. This divergence between market pricing and consumer psychology is common during political budget standoffs.

What should households do to prepare for fiscal cliff-related uncertainty?

Reviewing monthly budgets, building emergency savings, and understanding exposure to variable-rate debt are reasonable steps. Households with strained budgets may also want to check their FICO Score and debt-to-income ratio before making major borrowing decisions in an uncertain rate environment.