3 industries set for a fiscal cliff dive

Automotive, entertainment and apparel will be hurt the most by tax increases.

By TheStreet Staff Dec 21, 2012 3:16PM

Car salesman showing couple new silver hatchback in car showroom copyright Juice Images, Cultura, Getty Imagesstreeet logoBy Laurie Kulikowski

Even when President Obama and Republicans finally agree to terms to avoid the so-called fiscal cliff, taxes are sure to rise.

And that means certain industries -- particularly those that sell discretionary goods such as cars and jewelry -- are likely to feel the pain as consumers tighten up their purse strings.

Consumers are paying close attention to what's happening in Washington. According to a Gallup poll, 62% of Americans are following the fiscal cliff budget negotiations "very or somewhat closely." The poll was conducted via phone interviews of 1,022 adults over the weekend.

More than two-thirds of respondents say increases in federal income and Social Security payroll taxes, along with major cuts in domestic spending, would hurt the country. And 68% say if government leaders fail to agree and the fiscal cliff measures take effect, their personal financial situations would worsen.

"Without a doubt, nearly all Americans will see the effects of the fiscal cliff in their wallets. A complete elimination of recent tax cuts could lead the nation to a double-dip recession, as consumers significantly reduce their spending and create a drag on GDP," according to an IBISWorld report.

The report identified three industries -- automotive, entertainment and apparel -- that will be most severely hurt by tax increases.

"When disposable income declines, nonessential items, such as entertainment, travel and fashion apparel, are the first to be cut from a household's budget," the report says. Those industries "are highly sensitive to changes in per capita disposable income, meaning that a small decrease in income results in a disproportionately large drop in industry revenue."

1. Automotive
IBISWorld names the car industry, including manufacturers Ford (F), General Motors (GM) and Toyota (TM), but also dealerships, gas stations and car-service providers such as car washes, as "one of the U.S. economy's worst-hit victims" if no deal is agreed upon.

"Cars are highly discretionary and expensive purchases that require significant maintenance, so a reduction in disposable income would force consumers to delay new purchases over the next couple of years," the report says.

From 2007 to 2012, the auto sector had an aggregate 3.1% average annual decline in revenue due to the combination of falling disposable incomes and increasing prices. Crude oil volatility also didn't help the sector, IBISWorld says.

"The automotive sector's high sensitivity to consumers' purchasing power ultimately resulted in high revenue volatility during the past five years," IBISWorld says, adding that a fiscal cliff on top of already high and volatile gas prices does not bode well for the sector over the next five years.

2. Luxury retail apparel
Retail apparel includes women's clothing stores, shoe stores and department stores. Luxury apparel brands like Ralph Lauren (RL), Tiffany (TIF) and Michael Kors (KORS) also will suffer from the repeal of tax cuts.

Since 2007, the sector's revenue has dropped at an average annual rate of 2.3% because of falling disposable income and weaker demand.

"By contrast, those selling essential items, like babies' and children's clothes, will be less affected because demand for these items are based more on need rather than keeping up with trends," the report says.

3. Entertainment
Entertainment is a luxury, meaning "consumers are quick to cut them out of their budgets once per capita disposable income begins to decline," the report notes.

Companies in that industry include museums, casino hotels like MGM Resorts (MGM) and Caesars Entertainment (CZR), and golf courses and country clubs.

The entertainment sector's revenue has fallen at an average annual rate of 0.1% during the past five years, which "masks dramatic fluctuations over the period," the report notes.

The sector's revenue was falling in 2008 even before disposable incomes dropped and a rebound in consumer spending power "has not completely revived this economic segment, which foreshadows its deep potential drop if tax breaks are not revived at the end of 2012," IBISWorld says.

For small businesses, whether they're in the hardest-hit consumer-spending industries or elsewhere, it will be even more important to make smart financial and cost-savings decisions.

Next year "is really going to be a time to weed out a lot of people that aren't serious about their small businesses. The cream of the crop is going to rise," says Jason Nazar, co-founder and CEO of Docstoc.com, an online resource center for small-business advice, lease agreements, incorporation documents, business plan templates and other documents.

He suggests business owners "hunker down" in the first quarter to gauge how changes will affect them.

"The fiscal cliff sounds much worse than it actually is," Nazar says. "Even if the deadline passes, most of the tax implications for small businesses don't happen immediately." That said, the increasing payroll tax is "a very real concern for small businesses," he says. "It immediately affects fixed expenses."

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2Comments
Dec 21, 2012 3:52PM
avatar
Well,  the families with 60 bucks left after the monthly bills are paid are going to default on some loans too. Many bankruptcies and cars going back to the lenders again. If it continues, more houses in default. The federal government can't help the consumer because the federal government has it's own spending problem. You can only split the shrinking paycheck so many ways.
Dec 23, 2012 11:48PM
avatar
The "Cliff" means expiration of the Bush tax cuts, which were originally agreed upon with the understanding that they would be temporary, otherwise, they would not have been passed by Congress.  This will return the country to the Clinton-era tax rates.  People managed to live under those tax rates, and the economy did well.  So what has changed (and I ask that seriously)?  My wife and I will pay more in taxes, as will others.  We will tighten our belts, stick to our budget, and we will get by.  If the tax increases and mandatory spending cuts eliminate or at least significantly reduce the deficit, we will all be better off in the long run.  We have too many short term thinkers in this country, we have to look well down the road, not just to the next house coming up.  
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