Confidence Drops in Light of the Fiscal Cliff

Dec 12, 2012 | Budgets & Projections

Now only three weeks away from the fiscal cliff,  businesses and consumers are reacting to the economic uncertainty. The National Federation of Independent Business's most recent Small Business Optimism Index has plunged 5.6 points, one of the largest falls in NFIB's survey data. The fall in confidence among small businesses is equivalent to that during a typical recession.

Hurricane Sandy of course was one factor that could have impacted small business confidence, but even when NFIB excluded the states affected by Sandy, a large loss in confidence still remained. More likely, small businesses are starting to worry about the economic effects of the impending fiscal cliff. From NFIB chief economist Bill Dunkelberg:

Something bad happened in November—and based on the NFIB survey data, it wasn’t merely Hurricane Sandy. The storm had a significant impact on the economy, no doubt, but it is very clear that a stunning number of owners who expect worse business conditions in six months had far more to do with the decline in small-business confidence. Nearly half of owners are now certain that things will be worse next year than they are now. Washington does not have the needs of small business in mind.

This isn't surprising given some of the projections we've seen of the fiscal cliff; in a recent article in The Wall Street Journal, economist Alan Blinder suggested that the U.S. might see as high as 11 percent unemployment if we go over the cliff. This is higher than what others, particularly CBO, have said, but there is a general consensus that unemployment will tick upwards.

While survey data may have its flaws as a measure of how businesses invest and act, there is no question that confidence is important for our economic strength. Agreement on a plan that avoids the blunt and sudden spending cuts and tax increases found in the fiscal cliff, while putting out debt on a sustainable path in the future should give businesses and households the confidence and certainty to invest.