Economic optimism falls. Are 'fiscal cliff' worries to blame?

A monthly index of US economic optimism fell in December, as Americans became more worried both about the overall outlook and about their own personal finances.

The optimism index, part of the latest Christian Science Monitor/TIPP poll, showed the mood among Republicans to be particularly sour – reaching a record low for 12 years of survey data.

What's going on?

For Republicans, the November election was a moment of dashed hope, as President Obama won reelection and Democrats gained some added clout in the Senate by winning close-fought races. Republican optimism declined sharply in the November poll, and dropped again in the latest survey, taken between Nov. 30 and Dec. 8.

But in December, the optimism gauge also dropped among Democrats and independents – and across all age and income groups.

The drop occurred as the federal government's "fiscal cliff" came into news headlines. The expiration of Bush-era tax cuts on Dec. 31, coupled with other tax hikes and federal spending-cut mandates, could slow the economy or even send it into recession, analysts say. That may have begun weighing on consumers' spirits.

But it's not clear that the cliff is the biggest factor in the recent dampening of economic optimism. In December, a component of the optimism index on "satisfaction with federal policy" declined only about half as much as the other two elements of the index. The other two components of the index are a monthly question about people's personal financial outlook and a question about the six-month outlook for the overall economy.

The Economic Optimism Index stands at 45.1 this month, down from 48.6 in November and 54 in October. A reading below 50 reflects a pessimistic mood.

Among Republicans, economic optimism stands at a level of 23.7, compared with 42.3 for independents and 65.6 for Democrats.

"The Republican point of view is that America is not heading the right direction" on economic affairs, says Raghavan Mayur, president of TechnoMetrica Market Intelligence, which conducts the TIPP poll for the Monitor and for Investors Business Daily. "They are very worried about the debt."

Other indexes of the economic outlook have given mixed signals lately. The index of consumer confidence by the Conference Board, a business-oriented research and reporting service, rose in November. But a Reuters/University of Michigan index of consumer sentiment rose only slightly during that month, and recently fell in a December reading. Economists interpreted the drop as partly related to fiscal-cliff worries.

Other factors can strongly affect confidence or optimism in all these polls, including slow-but-steady improvement in the job market and volatile gas-pump prices.

When gauges of consumer confidence are released, politics is often off the radar as an explanation of American sentiment. Yet the TIPP poll has shown, over time, that political views can color people's perceptions of the economy.

In 2004, as the economy was in expansion mode with an improving job market, Democrats were generally pessimistic. Republicans at that time, with George W. Bush in the White House and heading toward a reelection win, were optimistic. Independents showed very modest optimism.

The political moods swung the opposite way starting in 2008 as Obama won the White House. And, despite high unemployment during the recession and its aftermath, Democrats have remained generally optimistic (with some ebbing and flowing) since then. Republicans have remained generally pessimistic.

The partisan gap is, predictably, very visible in the index component that relates to the federal policy climate. But the divergence along party lines is visible even in the way people report their own financial outlook, and their sense of where the economy will head over the next six months.

The TIPP Economic Optimism Index, although down sharply since October, is little changed from where it stood earlier this year, and is close to its average level during the Obama presidency.

Optimism fell sharply over the past month among women, Hispanics, and Democrats, all groups that tended to favor Obama in the election. One possible explanation is something of a "return to Earth" factor as the election campaign fades in the rearview mirror. All those groups still show above-average optimism levels in the poll (although for women it's only slightly so). And Democrats, despite an eight-point drop over the past month, still have higher optimism today than they did six months ago – in contrast to the US population at large.

Although fiscal bargaining has resulted in headlines about potential tax hikes for the rich, optimism barely budged (edging down to a level of 43.6) for people making over $75,000 a year.