We’re about to find out how consumers reacted to higher taxes and less take-home pay in January.
The U.S. government on Wednesday will release monthly retail sales. The result could tell us a lot about how the economy is likely to perform in early 2013.
Sales at U.S. retailers are forecast to edge up a scant 0.1%, seasonally adjusted, in the first month of the year, according to economists polled by MarketWatch. The retail report is by far the biggest economic indicator of the week.
The reason for lackluster spending: Working Americans are sending an extra 2% of their paychecks to the IRS after the end of a two-year “holiday” on payroll taxes. A bigger burst of spending, like the 0.5% gain in December, is unlikely.
“The expiration of the 2% payroll tax cut left many with smaller paychecks and tighter budgets,” economists Nigel Gault and Paul Edelstein of IHS Global Insight wrote in an email.
What’s more, the government raised rates in the highest tax bracket in a move to collect more money from the wealthiest Americans. The rich consume a disproportionate amount of goods and services compared to middle-income Americans. If they cut spending, that would also hurt retail sales.
Consumer spending usually accounts for about 70% of the U.S. economy. Retail sales are a smaller but still very large portion of that, and a good proxy for how fast the economy is growing.
Higher taxes obviously alter consumer behavior, but economists are unsure exactly just how much. It all depends on the size and nature of the increase; some taxes sting more than others.
One clue comes from how companies behaved in December. A slew of publicly traded businesses accelerated dividend payments before the end of the year to avoid a dividend tax increase that kicked in on Jan. 1.
Dividend payments soared 50% in December to power the biggest year-over-year increase in personal income in five years.
It’s a good news-bad news scenario.
On one hand, accelerated dividend payments will give Americans more money to spend in the next few months. That could cushion some of the blow from the payroll tax hike.
Then again, companies merely moved their dividend payments up at the expense of cash distributions later on. The upshot: Americans who earn regular dividend payments will see a drop-off later in the year.
“This along with the tax increases enacted with the American Tax Relief Act will likely lead to a nasty income hangover in the first half of 2013,” said Scott Anderson, chief economist of Bank of the West in San Francisco.
Another X-factor for the retail sales report is the resurgence in gasoline prices in January. Even though consumers have less money to spend, they have to pay more to fill up their tanks. That might have boosted sales at gas stations last month, perhaps causing overall retail sales to rise a little faster than expected.
Higher consumer spending at the pump, however, is not a plus for the economy. When people have to spend more on basic necessities, they have less to spend on a wide variety of other goods and services that they would prefer to buy.
If retail sales disappoint, financial markets are likely to have a sour reaction. The U.S. economy has enough problems and Washington isn’t helping matters with repeated showdowns over taxes, spending and debt.
Yet a surprising strong number — stripping out gasoline sales — would help lift an already buoyant stock market.
Jobless claims and confidence
Later in the week, investors will also keep an eye on weekly U.S. jobless claims and consumer sentiment.
The number of people who apply for new unemployment benefits each week has been stuck in a narrow range between 360,000 and 390,000 for much of the past year. Translation: layoffs have leveled off.
The problem is, hiring has also leveled off. The economy has added an average of just over 175,000 jobs a month in the past two years. Claims would have to make a break down to the 325,000 mark— and stay there for a while — to signal that job creation is about to enter another, higher phase.
Until that happens the unemployment rate, now at 7.9%, won’t fall very fast.
Consumer sentiment, meanwhile, is forecast to rise slightly in February after a small gain in January, based on the latest survey by Thomson Reuters/University of Michigan.
That would seem odd, given the recent tax increase, but economists point out that confidence fell sharply in December before the “fiscal cliff” budget fight in Washington was resolved. Sentiment is due for a bit of a bounce back, they say.
Maybe so, but that doesn’t mean consumers are confident. Most people know a friend or family member who’s been laid off in the past few years and twice as many Americans are negative about the country’s future vs. those who are positive, according to a large study by the John J. Heldrich Center at Rutgers University.
“Six in ten Americans believe they will not recover from the effects of the recession, a sobering assessment of the American recovery,” the widely publicized study concluded.
Source: Market Watch