Consumers get nervous

WASHINGTON – Consumer confidence plunged sharply in December thanks to the political drama unfolding in the nation’s capital.

The falling confidence, reported Thursday in the Conference Board’s monthly index of consumer sentiment, is a clear sign that the ongoing partisan wrangling in Washington over the approaching fiscal cliff is having direct economic consequences.

But within the survey of consumer confidence, there are signs of an ongoing recovery, with fewer participants reporting worsening conditions and more citing improvement.

That was supported Thursday by positive housing and employment data. First-time claims for jobless benefits fell by 12,000 to 350,000, and to a four-week average of 356,750. That’s the lowest four-week average since March 2008, several months before the near-meltdown of the U.S. financial system.

“The labor market is holding together despite lingering concerns over the fate of the fiscal cliff,” Neil Dutta, head of U.S. economics for forecaster Renaissance Macro, said in a research note.

In another positive sign, sales of new single-family homes climbed by 4.4 percent in November from October, the Commerce Department said, to the highest level since April 2010. New home sales are up 15.3 percent above November 2011.

Still, sales data and jobless claims look backward, whereas the confidence measure is an indicator of future bumps in the road for the economy. The Conference Board’s consumer confidence index declined by a larger-than-expected margin, falling from November’s reading of 71.5 to 65.1 in December. The drop is almost entirely caused by weaker consumer expectations.

“The sudden turnaround in expectations was most likely caused by uncertainty surrounding the oncoming fiscal cliff,” Lynn Franco, the group’s director of economic indicators, said in a statement accompanying the monthly report. “A similar decline in expectations was experienced in August of 2011 during the debt ceiling discussions.”

Those talks in 2011 dragged on for eight months, resulting in an embarrassing downgrade of the U.S government’s creditworthiness and slowing both growth and hiring.

Economists fear the same could happen again if Congress remains tied up in knots and unable to reach a deal before Tuesday on tax increases, spending cuts and an agreement to raise the nation’s debt ceiling.