Higher home prices are making for slightly happier consumers, a trend that is helping holiday sales and other consumer-driven parts of the economy, while business sits on the sidelines, worrying about the "fiscal cliff."
That trend should be apparent in the S&P/Case-Shiller home price data for September, released at 9 a.m. ET Tuesday. It is expected to show an annual return of three percent in the 20-city index.
"I've been somewhat surprised at how healthy consumer confidence has been over the last few months because the fundamental indicators haven't been fantastic," said Stephen Stanley, chief economist at Pierpont Securities. "It's not like the economy accelerated rapidly. I do think better housing is helping."
Economists expect confidence to rise to 73 from 72.2 but Stanley is more optimistic, expecting a jump to 78.
"The house price data has looked pretty good. If anything the pace of gains might taper off a little bit heading towards the latter part of the year but it definitely feels like we've turned the corner there," Stanley said. "That's a pretty big positive and at least one of the reasons consumer confidence has done better in the last couple months…history suggests that consumer confidence tends to go up in the November of election years."
The economy is facing tricky cross-currents. The housing recovery and the improved state of the consumer are vulnerable and dependent on Congress and President Barack Obama coming to an agreement on the fiscal cliff. The cliff is the expiration of dozens of tax breaks and the onset of automatic federal spending cuts that will occur starting Jan. 1 if Congress does not take action.
"Home price is the biggest wealth effect out there. We're finally seeing a reversal of what got us into this mess. But we still don't have escape velocity, and there's nothing normal about it," said Diane Swonk, chief economist at Mesirow Financial. She said there are signs the trend is picking up and should continue, unless consumers are jolted by the fiscal cliff.
Swonk said consumers have gone a long way to clean up their personal balance sheets. At 3 p.m. Tuesday, the New York Fed releases the third quarter report on household debt and credit. "We've gotten back down to debt loads that are 2003 levels, which are not low relative to history but they are relative to that run up in housing," she said.
So far, the consumer has
"We really are at a critical turning point," Swonk said. Business spending has slowed and some of
"Measures of uncertainty in general tend to impact business decisions affecting investment and hiring to a greater extent than consumers," said Barclays economist Peter Newland.
The consumer is not a strong enough engine to turn the tide of the negative effects of the fiscal cliff, which Swonk and Newland both expect will result in about $200 billion fiscal drag next year. If Congress does not act, the drag would be $500 billion or greater.
(Read More: Full Coverage of the Fiscal Cliff)
"I think next year could be pretty good if we get past the cliff," said Swonk, adding that China's economy shows signs of turning and Europe is starting to get it debt problems under control. Late Monday, a deal was reached by euro zone officials on Greece's aid disbursement, and that should help calm market concerns.
Economists also say the impact of Super Storm Sandy has also added to the uncertainty. While ultimately Sandy might become a slight positive for the economy, it has slowed growth in the fourth quarter.
"You have a slow start to repairs and rebuilds," said Swonk, adding ultimately $100 billion to more than $200 billion could be spent in insurance money, federal FEMA funds and from homeowners' savings to
The real toll of Sandy has yet to be seen, with business disruption also a factor, given the blackouts and flooding in Manhattan, disruptions in transportation and damage to energy infrastructure. US Airways, for instance, said Tuesday that Sandy cost it $15 million in earnings.
(Read More: Superstorm Sandy Floods Gold Vault in Manhattan)
Some of the spending to rebuild from Sandy should show up as a positive by the first quarter. Swonk now expects first quarter GDP of 1.4 percent.
"If we go off the cliff, we're in a recession. It could be negative two or 2.3 percent," she said.
The positive is if the cliff is avoided and Congress strikes a "grand bargain," of revenue hikes and spending cuts, the economy could get a lift from confidence. "The fact households have gotten their balance sheets in shape, and businesses have been sitting on their hands for the better part of six months now and the longer that goes on the more pent up activity there is waiting to be unleashed," Stanley said.
But economists also worry the hit from the reversal of the 2 percent payroll tax cut could be an immediate hit to the economy since it affects all taxpayers. That tax break is seen as one that neither political party supports retaining.
There is still a deep divide when it comes to raising taxes on the wealthy. Newland said that group is more able to smooth out the effects of a tax hike, and the least likely to change spending patterns.
Follow Patti Domm on Twitter: @pattidomm
Questions? Comments? Email us at firstname.lastname@example.org