By Edward Krudy
NEW YORK (Reuters) - Consumer sentiment unexpectedly deteriorated for a second straight month to its lowest in over a year in January, with many consumers citing fallout from the recent "fiscal cliff" debate in Washington, a survey released on Friday showed.
The sharp drop in sentiment over the last two months coincides with rancorous federal budget negotiations that have led to higher taxes for many Americans.
Just weeks after that deal, President Barack Obama and Republican lawmakers are expected to enter another tough round of negotiations over spending cuts, which could dent consumer confidence still further.
"The handling of the fiscal cliff talks and the realization that paychecks are going to be smaller due to the sunset of the payroll tax holiday are probably weighing on consumer attitudes at the moment," said Thomas Simons, a money market economist at Jefferies & Co. in New York.
While most of the scheduled tax hikes and spending cuts forming the fiscal cliff were avoided when Congress struck a deal on January 1, most U.S. workers saw their take-home salary diminished by the expiry of two percentage-point cut in payroll taxes.
"With the debt ceiling yet to be tackled and more political acrimony on the way, we suspect that confidence has room to deteriorate further," Simons said.
The Thomson Reuters/University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 71.3, down from 72.9 the month before. The index was at its lowest since December 2011. It was also below the median forecast of 75 among economists polled by Reuters.
"The most unique aspect of the early January data was that an all-time record number of consumers - 35 percent - negatively referred to the fiscal cliff negotiations," survey director Richard Curtin said in a statement.
"Importantly, the debt ceiling debate is still upcoming and could further weaken confidence," he said.
House Republicans have signaled they might support a short-term extension of U.S. borrowing authority when the government exhausts that capacity sometime between mid-February and early March. A failure by Congress to raise this debt ceiling could result in a market-rattling government default.
On Friday, Republican House Majority Leader Eric Cantor said the House would consider a bill next week to extend the debt limit by three months in order to force the Senate to pass a budget.
U.S. stocks remained little changed after the data. The S&P 500 <.SPX> hit a five-year high in the last session. But on Friday, a weak outlook from Intel
So far there has been a disconnect between what consumers say and do. U.S. retail sales increased a better-than-expected 0.5 percent in December. But given the recent weakening in sentiment investors will be watching for any signs that spending is starting to slip.
"The impact on consumers will be from the hike in the social security tax. That is undoubtedly going to hit discretionary spending. So this may be a signal of things to come," said Michael Woolfolk, a senior currency strategist at BNY Mellon in New York.
The consumer survey's barometer of current economic conditions fell to 84.8 from 87.0 and was below a forecast of 88.0. The gauge hit its lowest since July.
The survey's gauge of consumer expectations also slipped, hitting its lowest since November 2011 at 62.7 from 63.8, and was below an expected 65.2.
The survey's one-year inflation expectations rose to 3.4 percent from 3.2 percent, while the survey's five-to-10-year inflation outlook was unchanged at 2.9 percent.
(Additional reporting by Steven C. Johnson and Ellen Freilich; Editing by Andrea Ricci)