Payroll taxes take a bite out of retail sales

Of all of the elements of the US fiscal cliff, the most damaging from a consumer perspective is likely to be the increase in payroll taxes as it hits a broad swathe of consumers in the middle class. This was confirmed today via the release of retail sales data at 830 ET, which showed retail sales inching up ever so slightly in January from the month before.

Retail sales rose 0.1% in January versus the 0.5% increase in December. Excluding the volatile food and energy energy components showed a 0.1% increase versus December’s 0.7% increase. And this was in the first month of the payroll tax effect. By contrast, consumer spending grew at a 2.2% annualised rate in Q4 2012. And sales are up 4.7% compared to January 2012.

I anticipate that retail sales will fall  as the impact of the increased taxes and the federal government budget-cutting start to feed through in earnest. Q4’s GDP numbers were already negatively impacted by cuts and inventory destocking, bringing the preliminary estimate down by 0.1% This will be revised higher, though. Right now, the tax and spending changes still have a one-off feel. But these are permanent decreases in private sector income that will eventually have the effect of lower household savings rates or decreased household spending or both. I expect, as household debt levels are still high, that much of the impact will be in a reduction of savings. 

If the sequester happens as planned, expect the adjustment by households to be that much greater.


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.