The Debt Debate’s Consumer Hangover

The impasse in Washington has already taken a steep economic toll and will linger as shoppers go about their holiday shopping.

Harry Reid

The consumer damage might already be done.

This story first appeared in the October 17, 2013 issue of WWD.  Subscribe Today.

Wall Street breathed a sigh of relief Wednesday as Washington lawmakers put the finishing touches on a last-minute deal to restart the government and avoid a potentially catastrophic debt default. But experts said the impasse — and how close the politicians came to the edge — has already taken a steep economic toll and will linger as shoppers go about their holiday shopping.

“It’s another log on the fire of consumer discontent,” said Paco Underhill, founding president of Envirosell. “The more uncertainty that is broadcast through the government, the more they continue to sublimate the problem rather than face it, the more the consumer is going to…have another incentive to shut their wallets. Washington doesn’t seem to want to step beyond its own doorstep.”

Lawmakers were close to solving the immediate problem, but only for a short while, setting up another possible standoff shortly after New Year’s if they don’t come to a broader arrangement.

The proposed Congressional deal would immediately reopen the government — which has been shut since Oct. 1 — and keep the lights on until Jan. 15. The nation’s debt ceiling would also be raised through Feb. 7, avoiding a default in U.S. Treasury notes, a vital underpinning of the global economy. The legislation would also give back pay to the hundreds of thousands of workers that have been furloughed during the shutdown.

The Senate was slated to take up the legislation Wednesday evening and expected to pass it, followed by a late-night vote in the House, where passage was also expected but somewhat capricious.

That was good enough for investors, who rejoiced and pushed the S&P 500 Retailing Industry Group up 1.2 percent, or 10.37 points, to 849.98, as the Dow Jones Industrial Average, increased 1.4 percent, or 205.82 points, to 15,373.83.

Not everyone was as forgiving.

Matthew Shay, president and chief executive officer of the National Retail Federation, noted, “While there is some satisfaction at achieving a deal, today’s agreement between the House and Senate merely ensures more opportunities to continue the debate while avoiding tough decisions about our economic future.”

Shay said retailers and consumers “need stability and certainty from policy makers in Washington and assurance that the economy will not implode due to their actions or, more important, lack thereof. This new norm of legislating from crisis to crisis is no way to govern.”

Economists at IHS Global Insight said the government shutdown cost the economy $3.1 billion in gross domestic product from lost government services alone. All told, the forecasting firm cut its fourth-quarter outlook for GDP growth to 1.6 percent from 2.2 percent.

The blow comes during a period of pronounced softness for retailers, who have intensified promotions to move inventory that was ordered in better times.

“The consumer is very concerned and holding back,” said Walter Loeb, retail consultant. “No one knows what anything means, whether for their own income, higher taxes, and all. With so much uncertainty, the consumer is not in the mood to spend.”

Kit Yarrow, a consumer psychologist and author of the forthcoming “Decoding the New Consumer Mind: How and Why We Shop and Buy” (Wiley), said consumers feel different about their prospects when they lose faith in their leaders.

“They’re more self-reliant, looking for their own solutions,” she said. “They feel much more ‘all about me.’ It makes them more opportunistic when it comes to getting more for less. Nobody really feels happy or optimistic right now and that does affect spending. The effects of that typically last a few weeks to a month.”

Yarrow said it would have a “medium-sized” impact on the holiday selling season, which is especially short this year given the timing of Thanksgiving.

“The consumer is nervous about a lot of things,” said Robert N. Wildrick, chairman of Jos. A. Bank Clothiers Inc. “There is no visibility on Obamacare, whether good or bad. They’re confused. They are also disgusted with the inability of government to get the job done. Because they all don’t know what the future will bring, the consumer is becoming tightfisted.”

The Wet Seal Inc. on Tuesday lowered its guidance for both earnings and same-store sales. John Goodman, ceo of the Foothill Ranch, Calif.-based chain, said, “Following our strong start to the [third] quarter, mall traffic softened considerably during September and has continued into October, resulting in an increasingly promotional competitive environment in recent weeks.

“We expect to deliver improvement in most key financial metrics versus the year-ago period, but the need to implement more extensive promotions than planned has caused us to lower our margin and earnings expectations for the quarter,” he said.

Internet giant eBay Inc.’s third-quarter sales met expectations, rising 14 percent to $3.89 billion, but the company disappointed with its outlook and saw its stock fall 5.2 percent to $53.52 in after-hours trading. EBay projected fourth-quarter sales would rise to a range of $4.5 billion to $4.6 billion — less than the $4.64 billion that Wall Street projected.

“The U.S. e-commerce softened considerably and we have a cautious outlook for the holiday season,” said Bob Swan, eBay’s chief financial officer and senior vice president of finance, on a call with analysts.

An NRF survey found that “political gridlock in Washington” was very likely or somewhat likely to impact the holiday spending of 29 percent of shoppers. The survey of 6,415 U.S. adults was conducted between Oct. 1 and 8.

The age group most apt to react to the drama in Washington were those between 55 and 64, with 32.7 percent saying it would affect holiday spending, while the least concerned were those 18 to 24, with only 20.2 percent expecting it to have an effect on their spending.

Businesses across the country felt the pinch of political gridlock, though.

The Federal Reserve’s Beige Book showed that companies grew increasingly concerned about the budget impasse, the government shutdown and costs associated with implementation of the new health care law, and were hesitant to increase hiring.

“Several districts reported that contacts were cautious to expand payrolls, citing uncertainty surrounding the implementation of the Affordable Care Act and fiscal policy more generally,” the Fed report said.

Merchants in Cleveland and Dallas noted they planned to limit hiring to staffing new stores, while businesses in Philadelphia, Cleveland and Chicago said hiring for the holiday season would be “about the same” as last year.

The Beige Book, an anecdotal survey of businesses in 12 regions of the country, covered the period from September through early October and captured some of the growing angst in the private sector related to the federal government shutdown.


Commerce Department
Total staff: 46,420
Furloughed: 40,169
On the job during shutdown: 6,251

U.S. Trade Representative’s office
Total staff: 232
Furloughed: 171
On the job during shutdown: 61

Department of Homeland Security
Total Staff: 59,561
Furloughed: 6,888
On the job during shutdown: 52,673

Labor Department
Total staff: 16,304
Furloughed: 13,350
On the job during shutdown: 2,954

Federal Trade Commission
Total staff: 1,178
Furloughed: 930
On the job during shutdown: 248

Consumer Product Safety Commission
Total Staff: 540
Furloughed: 518
On the job during shutdown: 22