Debt fight hitting consumer spending

The battle over raising the US debt ceiling appears to be frightening American consumers into pulling back spending, Goldman Sachs said in a report Wednesday. Consumer sentiment has been hit by fears that the political impasse over hiking the debt ceiling before government borrowing is maxed out on August 2 could force a crippling government shutdown or even a debt default, the investment bank's research department said. Goldman cited the University of Michigan consumer sentiment index, which plunged unexpectedly in its early July reading, as well as data showing sluggish consumer spending so far this year. "While it's certainly possible that the drop in confidence reflects other factors... the extent, timing, and composition suggests that the uncertainty surrounding the debt ceiling is probably a contributing factor," the report said. "Weakness in consumer confidence is consistent with the relatively soft government retail sales report for June, and suggests July sales are at risk as well," it said. The Wall Street bank called the timing of the drop in sentiment consistent with a sharp surge in media coverage of the debt ceiling stalemate. It said there was further evidence of the debt and budget deficit fight's negative impact on the economy in a "large rotation" by individual investors out of stocks and into bank deposits. Goldman said it was confident that politicians would strike a deal at the last minute to avert a disaster. But with the economy already operating at "stall speed," it said, "any self-inflicted wounds are particularly unwelcome." "If a debt ceiling deal is reached prior to the deadline, confidence and spending may both recover somewhat thereafter."