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Did January's tax increase finally take a bite out of retail sales in March?
04/12/2013 3:43 pm EST
I don’t think so. And, in fact, the specific explanation is worrying—if only slightly at this point--for growth in the U.S. economy in the coming months.
Economists surveyed by Bloomberg had expected that March retail sales would be flat so the 0.4% decline is a surprise. Especially, coming as it does, after 1% growth in February.
The likely explanation, and it’s convincing to me, is that what we’re seeing in the March numbers is a delayed reaction to the tax increases included in January’s deal to avoid the fiscal cliff. It’s taken a while for consumers to adjust their spending downward to account for the 2-percentage point increase in the Social Security withholding tax that was part of that package. The Tax Policy Center, estimates that 77% of U.S. households are paying higher taxes in 2013 because the fiscal cliff deal let cuts to the Social Security tax rate expire. In 2012 that reduction in Social Security withholding was worth about $1,000 to a family at the $50,000 income level.
If the lower retail sales numbers are a delayed result of that tax increase, instead of a reaction to a temporary news event or sentiment shift, then we could be looking at a drag on U.S. growth that could persist for much of 2013.
Results released today in the Thomson Reuters/University of Michigan sentiment index suggest, to me, this longer lasting effect tied to the tax increase. The sentiment index for April fell to 72.3 from 78.6 in March. Economists surveyed by Bloomberg had expected no change in the index.
Still the U.S. stock market has concluded, rightly in my opinion, that this morning’s number doesn’t mean consumer spending is about to fall off a cliff. Slightly slower growth, yes, but absent some other negative news, not the end of the modest growth projected for the U.S. economy. The Standard & Poor’s 500 stock index is down 0.48% as of 2 p.m. New York time. Given the solid move up this week, a decline of this size is no more than normal end of the week profit taking and portfolio dressing.
Investors will see the first read on first quarter U.S. GDP growth on Friday, April 26.
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