News Column

Retail Report Will Show Taxes' Impact

March 12, 2013

Consumers' taxes went up Jan. 1, but it looks as if they've kept spending despite a hike in payroll taxes that cost the average family about $20 a week.

Wednesday, the government is set to release data on February retail sales. Despite predictions that a 2 percentage-point climb in Social Security taxes would slow the recovery, preliminary data suggest that consumers have kept up their consumption, in part by cutting savings to levels not seen since 2007.

"We all assumed there would be a significant effect, but it has been pretty modest," Citigroup economist Steven Wieting said. "I'm running out of things to drag down the American economy."

The report is expected to show consumers boosted spending by a seasonally adjusted 0.5 percent, or 0.3 percent after excluding gasoline and cars, according to economists surveyed by Bloomberg. That would be a pickup from the 0.1 percent growth in January.

Even economists who think the report will show spending falling say the consumer has been more resilient than expected after the payroll tax hike. "We've expected some hit from that, but it really hasn't materialized," said Benjamin Engen, of Action Economics, who predicts February retail sales will fall 0.8 percent, excluding gas and cars. "It will take time for people to get these smaller paychecks and adjust their behavior."

The reasons: People are confident about job prospects, encouraged by rising stock and house prices, and think the economy will be stronger in six months, Wieting said,

That shows up in strong levels of consumer confidence: Surveys from both Bloomberg and the University of Michigan showed gains in February, with Bloomberg's index hitting its highest level since early 2008. It has also produced strong early results for car sales and for the Johnson Redbook Index, a traditionally reliable predictor of consumer spending on clothing, Engen said.

The bear case is that consumers will eventually have to adjust to lower take-home pay, Engen said.

But retailers hoping for a lift in March or April from more consumers spending tax refunds may be too optimistic, Goldman Sachs said in a report last week. The tax-filing season got off to a late start because Washington's fiscal-cliff debate kept tax laws from being passed until New Year's. Wal-Mart said last month that slow early February sales were partly due to delays in refunds.

The IRS has processed about $20 billion less in refunds than at this time last year, Goldman economist Alec Phillips said in a report last week. He said that gap is likely to stay wide, partly because the increase in capital gains taxes that also took effect in January pushed some investors to sell assets in December, increasing their 2012 taxes.

Source: Copyright USA TODAY 2013

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