Economic First Look: Gauging the Tax Hike's Bite

 | Feb 23, 2013 | 12:00 PM EST
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  • Chicago Federal Reserve National Activity Index, 8:30 a.m. (all times EST)
  • Dallas Fed Manufacturing Survey, 10:30 a.m.
  • Dennis Lockhart, President of the Atlanta Fed (nonvoter), speaks, 7 p.m.


  • Federal Housing Finance Agency House Price Index, 9 a.m.
  • S&P Case-Shiller Home Price Index, 9 a.m.
  • New Home Sales, 10 a.m.
  • Consumer Confidence, 10 a.m.
  • Fed Chairman Ben Bernanke speaks, 10 a.m.
  • Richmond Fed Manufacturing Survey, 10 a.m.


  • Durable Goods Orders, 8:30 a.m.
  • Ben Bernanke speaks, 10 a.m.
  • Pending Home Sales Index, 10 a.m.
  • EIA Petroleum Status Report, 10:30 a.m.


  • GDP, 8:30 a.m.
  • Jobless Claims, 8:30 a.m.
  • Chicago Purchasing Managers Index, 9:45 a.m.
  • Kansas City Fed Manufacturing Index, 11 a.m.
  • Richard Fisher, President of the Dallas Fed (nonvoter), speaks, 4:30 p.m.


  • Motor Vehicle Sales, released by each automaker throughout day with media tally in late afternoon
  • Personal Income and Outlays, 8:30 a.m.
  • PMI Manufacturing Index, 8:58 a.m.
  • Consumer Sentiment, 9:55 a.m.
  • Institute for Supply Management Manufacturing Index, 10 a.m.
  • Construction Spending, 10 a.m.

This week brings a number of important economic indicators, including those covering manufacturing, housing and the consumer. Also slated for this week is the semiannual congressional testimony from Federal Reserve Chairman Ben Bernanke, with an address to the Senate Banking Committee Tuesday and to the House of Representatives Financial Services Committee Wednesday.

For this week's deep dive, I am interested in the consumer, particularly in the wake of elevated gas prices, coupled with the elimination of the payroll tax holiday. What is the current state of disposable (i.e., after-tax) incomes? Outside of gas and food, are consumers cutting back consumption in real terms? To answer these questions, we'll turn to the January Personal Income and Outlays report -- the first comprehensive look at consumers' incomes and spending patterns since the onset of the payroll tax increases.

Absent pay raises from their employers, most workers will see their paychecks shrink this year due to the end of the payroll tax cut, even if middle-class income taxes don't change. In January, aggregate payrolls -- which factor in total hours worked times hourly wages -- increased 0.4% from December, according to the Bureau of Labor Statistics. The payroll tax rose from 4.2% to 6.2% for earned income greater than $113,700 this year, and when you take that into account, you are left with declining after-tax wage and salary incomes for most workers.

On the other hand, we need to consider a jump in incomes that some consumers earned in late 2012, as some of those funds may have been spent last month. The fourth quarter saw companies pay bonuses to certain employees and some dividends to shareholders in late 2012, instead of in 2013, when tax rates were expected to increase.

When we factor in the seasonal-adjustment factor, plus any extra dividend payments, it somewhat complicates calculation of subsequent income gains and savings rates. Incomes grew by 2.6% (not annualized) in December, but we will likely see a giveback in January due to some of these seasonal adjustments that "expected" these bonuses or dividends to be paid in early 2013. As a result, January is expected to see a 2% a drop in personal incomes.

Economic factors may affect different retail establishments in various ways, too. A retailer's customers may include a greater proportion of people least affected by the tax hike -- and, if that's the case, it will likely fare better than retailers who cater to harder-hit consumers. Remember that the payroll tax only applies to the first $113,700 in earned income, and not at all to income from dividends, rentals or other sources. As a result, it's likely better-off consumers received more of the benefit of the aforesaid year-end income boost, and were far less stung by the tax increase.

As to what we saw in January retail sales, the headline number says retail sales grew by just 0.1%. You might say that's a weak showing, but now look at the details of the report. January sales at general-merchandise outfits climbed by 1.1% vs. December, with department-store sales alone gaining 1%. These numbers aren't annualized, so this is a rather strong showing. (Keep in mind that these data are not adjusted for inflation, and price changes -- especially for the volatile gas and food components -- can influence the headline.)

Other categories, however, were mixed. Furniture-store sales fell by 0.2%, with a 0.3% drop in clothing-stores. On the other hand, electronics retailers saw their top line up 0.2%, while building material store sales were better by 0.3%. Restaurant and bar sales, meanwhile, were flat as gasoline sales edged up 0.2%, not adjusted for price changes.

We can see softer revenue in the two biggest categories that can skew the results of the headline. Autos, for example, edged down 0.1% -- but sales here are still 9.4% higher than they were a year earlier, so some giveback might be expected. Grocery and beverage stores, the second-biggest category of retail sales, came in flat. If we exclude both autos and food, overall retail sales climbed 0.21% last month. This might not be robust but, annualized, it is about 2.5% in spending growth.

These early data aren't conclusive, given the year-end income receipts by some consumers. Other folks, meanwhile, may not yet have fully noticed their shrunken paychecks. Stay tuned as individual retailers report over the coming months, as this may tell us about any potential spending patterns among different income groups that might be evident in luxury or discount retailers or those in between. Still, the overall effect of lower after-tax incomes can't be positive -- even though we did need to revert it to levels that might better sustain the Social Security trust fund.

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