Usually around the end of the year, Americans hang out with their families, go on vacation or just unwind. It's a time to recharge and gear up for a productive new year.
This year is obviously different. Anxiety is pouring from a gloomstack located in the nation's capital and spreading across the nation, as legislators trade enraged barbs and blame each other for doing nothing to head off the fiscal cliff. The surreal standoff raises the likelihood of 2013 beginning with sweeping tax hikes that hit just about everybody, paired with big cuts in government spending, unless there is some last-second deal to delay or avert the measures scheduled to go into effect.
Consumers who have been shrugging this off have finally started paying attention, and they're appalled. The Conference Board's consumer-confidence index had been rising sharply since the end of the summer, but it has plummeted recently on account of the cliff. Consumers actually remain upbeat about present conditions, since housing is on the rebound and jobs seem secure. But they're scared about the future, and who can blame them. Congressional ineptitude seems poised to trigger a recession, if not worse.
The stock market is going the wrong way, too. A week before Christmas, when there was still hope of a deal to avert the cliff, the stock market was up a healthy 15 percent for the year. Since then it has fallen by 3 percent, with much deeper losses likely if the cliff deadline, December 31, passes without a deal.
Businesses have been paying attention to the cliff all year, and basically sitting on the sidelines over the last few months, waiting to see what happens in Washington. Business spending is down sharply, one reason GDP growth has fallen from 3 percent in the third quarter to an estimated 1 percent or so now. It's a wonder that the jobless rate hasn't risen, yet companies seem to be holding onto employees in the belief (hope?) that Washington will reach a cliff deal soon and things will get back to normal.
Yet the economy has slowed so much that it's now close to recessionary levels of activity, and that's prior to the tax hikes and spending cuts actually going into effect. Right now, it's only worry about the fiscal cliff that's gumming up the economy. Yet psychology can be powerful. Holiday shoppers apparently pulled back during the last few days before Christmas, resulting in a weaker than expected holiday shopping season. They prudently began to prepare for possible tax hikes by spending less.
Some in Washington seem to believe that going over the cliff won't be that big a deal if there's some kind of post-deadline agreement to roll back all the new tax hikes and spending cuts retroactively. But some damage has already been done, and it can't be rescinded. Consumers who cut back on spending over the holidays, for instance, aren't likely to buy more holiday gifts in January or February. There will also be considerable costs associated with accounting changes and other ad-hoc workarounds needed to adopt a new set of rules, then chuck them and go back to the old rules, if that's what happens.
The other portentous event that could occur is a stock-market plunge, similar to what happened in the summer of 2011 when negotiations to extend the nation's borrowing limit went to the last second and caused the first-ever downgrade in the U.S. credit rating. Stocks can bounce back, but before that happens, a plunge tends to crush confidence even more, even among people who don't own stocks. When financical turmoil hits, everybody knows it, and everybody hunkers down in ways that make it worse.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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