U.S. consumers have seen better days.
The expiration of the payroll tax holiday earlier this year has taken a 2% chunk out of weekly earnings – a big hit for lower and middle income Americans. AAA says the price of a gallon of regular gasoline has jumped 47 cents in one month, adding more downward pressure on consumers. And if Congress and the White House cannot find a way to stave off the $1 trillion in across-the-board spending cuts (also referred to as the “sequester”) that hits military and domestic programs before March 1, hundreds of thousands of workers – especially military contractors – could lose their jobs.
The Daily Ticker’s Aaron Task and Henry Blodget both agree that the sequester would adversely impact the U.S. economy, especially at a time when economic output remains weak. The economy contracted in the fourth-quarter of 2012 mainly because of reduced military spending. If the sequester takes effect as planned, employee furloughs in the Defense Department as well as air traffic controllers, meat inspectors and other government workers could begin in April. Washington finds itself in this precarious situation because of a budget stalemate that occurred in summer of 2011. A “super committee” of Democrats and Republicans were unable to agree to a large-scale deficit reduction package and as a result both parties signed off on the Budget Control Act, which slashed domestic and military spending by $1 trillion over the next decade. The deal between the two parties was designed to force them to come to the negotiating table again to avoid these draconian measures but both sides have been reluctant to make compromises. Republicans refuse to increase taxes and Democrats are unwilling to make steep cuts to popular social programs without additional revenue from higher taxes.
President Barack Obama has thrown his support behind a Democratic stopgap measure that would modestly cut the deficit by closing tax loopholes; the proposal also delays the deep reductions in spending until later in the year.
Whether or not lawmakers can agree to another sequester deal, U.S. consumers are struggling to pay bills and stay afloat. According to The Wall Street Journal, food companies are lowering future sales forecasts and marketing cheaper products to cash-strapped consumers. Burger King (BKW) has been promoting its value menu items and reduced the cost of its Whopper Jr. sandwich by 71 cents. Wal-Mart (WMT) is stocking shelves with lower-priced items to adjust to the pressures on consumer spending.
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