With tax hikes and rising gasoline prices sapping consumers' pocketbooks and politicians preaching sequester gloom and doom, the IBD/TIPP Economic Optimism Index plunged 5.1 points in March to 42.2, the lowest since December 2011.
The federal economic policies confidence gauge fell 11% to 35.5, also a 15-month low. The six-month outlook index cratered 18% to 38.8, the worst since October 2011. The personal financial outlook reading lost 4.4% to 52.2, though that's still above the neutral 50 level separating optimism and pessimism.
January personal income tumbled 3.6%, the worst monthly drop in 20 years, in the wake of fiscal cliff tax hikes on payrolls and high earners. Gasoline prices climbed day after day. Stock prices have wobbled as Italy's inconclusive election revived concerns about the eurozone and global economy. Meanwhile, President Obama has been campaigning across the country, warning that automatic spending cuts will have a disastrous impact on government services and the economy. The sequestration just took effect this month.
Small wonder the overall index's 10.8% decline was the worst since August 2011. That's when Standard & Poor's downgraded U.S. sovereign debt during the debt ceiling fight. To end the standoff, the White House proposed the sequester, which Obama now derides as "dumb" cuts.
Obama's popularity hasn't been affected by the deteriorating economic optimism.
The IBD/TIPP Presidential Leadership Index rose 1.5 points in March to 51.6, a four-month high.
Democrats, however, showed a sharp drop in their economic optimism. Their index reading fell 9.4 points to 58.6, the lowest since the end of 2011. But the decline was deep and widespread, with independents, women and investors the most pessimistic since late 2011.
"Americans across the board think that the economic outlook is grim," said Raghavan Mayur, president of TIPP, a unit of TechnoMetrica Market Intelligence, IBD's polling partner. "The big slide in our economic outlook subindex perhaps signals a turning point and an impending entry into a recession. This month nearly 60% believe that the economy is in a recession."
Fifty-nine percent of Americans responding say the U.S. is in a recession vs. 35% who say it isn't. That includes 61% of independents. But those readings haven't changed much in recent months.
Consumers haven't necessarily let their fears override their spending habits. Real consumer spending rose just 0.1% in January, with outlays on big-ticket durable goods lower. Yet other reports show housing continuing to improve, with General Motors (GM), Toyota (TM) and others reporting solid auto sales in March. Manufacturing activity has picked up the pace while business investment showed some signs of life.
Major retailers will report March sales figures on Thursday. On Friday, the Labor Department will release its monthly employment report.
IBD/TIPP conducted the national poll of 847 adults from February 25 to March 4. The margin of error is +/-3.4 percentage points.
As for Washington, Obama wants higher taxes as part of any sequester offset. But Republicans say they won't support another round of tax hikes so soon. They also point out, despite qualms about defense cutbacks, the spending cuts are equal to just one-quarter of 1% of the U.S. economy.
The sequester squabble may get folded into bigger budget battles on the horizon. Congress must approve a new continuing resolution to fund the government. Soon after that, the debt ceiling must be raised yet again. Political uncertainty will continue for the foreseeable future, with short-term, last-minute budget fudges likelier than a sweeping, long-term "grand bargain.