Story first appeared on The Wall Street Journal -
Consumers keep at it despite tax increase at start of year
Consumers increased spending in January for the third straight month, suggesting that a big drop in income and a tax hike at the start of the year only exerted a mild drag.
Consumer spending advanced a seasonally adjusted 0.2% last month, the Commerce Department said Friday. That matched the estimate of economists polled by MarketWatch.
Americans continued their spending ways despite an increase in their taxes and the biggest plunge in income in 20 years.
A two-year law that reduced payroll taxes by 2% expired in January and the government also raised rates on the very rich. For people earning $1,000 a week, the payroll tax hike takes an extra $20 out of their paychecks.
Incomes, meanwhile, sank 3.6% in January after spiking 2.6% in December. Companies accelerated the payment of rewards for workers and investors in December to avoid higher tax rates in January, accounting for the big swing.
Consumer spending represents as much as 70% of the economy. When Americans buy more goods and services, businesses generate higher sales and profits and can afford to hire extra workers. Less spending results in slower economic growth.
In Friday trades, U.S. stocks zig-zagged from losses to gains amid a raft of economic data.
A survey of consumer confidence rose slightly and a U.S. manufacturing gauge climbed to nearly a two-year high.
Although spending largely held up in the first month of the tax increase, many analysts think it will exert some downward pressure on the economy in the next few months. Consumers don’t always change their behavior immediately after a tax increase.
In one potentially troubling sign, spending on durable goods such as appliances, furniture, or consumer electronics fell 0.8% in January to mark the first drop in three months. Consumers tend to cut back on big-ticket items if they feel more economic stress.
What’s more, higher gasoline prices and sharp cuts in federal spending could also apply the brakes to the economy in the coming months.
On Friday, the government is supposed to begin the process of slashing federal outlays by as much as $85 billion over the next six months under the rules of a so-called sequester. Top Democrats and Republicans were scheduled to meet at the White House to discuss the matter, but no breakthrough was expected.
Economists say the spending reductions could hamper the ability of the U.S. to grow any faster than the 2.2% rate by which it expanded in 2012. The economy needs to grow much faster to quickly reduce the nation’s 7.9% unemployment rate.
“One thing is perfectly clear — most American will remain cautious in their spending habits,” said Chris Christopher, director of consumer economics at IHS Global Insight.