Surprise! Consumers kept spending in January, despite the payroll tax hike

February 7, 2013

If  higher payroll taxes are going to wallop American consumers in the way many have feared, it didn’t show up in some leading retail chains’ January sales numbers.

Economists had been bracing for the impact of a 2 percentage-point increase in the payroll tax that is expected to cost the typical worker about $1,000 over the course of the year. But sales at stores that have been open at least a year – a key measure of a retailer’s health – rose a surprisingly strong 5 percent in January compared with a year ago, according to the International Council of Shopping Centers.


January was a good month for same-store sales at major chain retailers.

Americans received a temporary, 2 percentage-point cut in the payroll tax as an economic stimulus measure at the start of 2011; the reduction was allowed to expire at the end of 2012, cutting workers' after-tax wages.

Several of the 22 chains that reported sales Thursday morning enjoyed double-digit growth. Limited Brands rose 9 percent in January from a year ago. Nordstrom was up 11 percent, and Macy’s jumped 12 percent.

But Michael Niemira, ICSC’s chief economist who compiles the industry-wide results, cautioned that the gains do not indicate that shoppers are back to full health.

He noted that several states raised their minimum wage in January, helping to offset the rise in the payroll tax and affecting about a million workers. He also expects the full impact of the payroll tax to show up later in the year.

“I wouldn’t expect it to hit that hard that quickly,” Niemira said. “The payroll tax is one of these things that accumulates.”

Target Chief Executive Gregg Steinhafel noted that even though the chain’s 3 percent sales growth was in line with expectations, consumers still seemed restrained.

"Our guests continue to shop with discipline in the face of a slow economic recovery and new pressures, including recent payroll tax increases,” he said in a statement.

Niemira predicted that consumer spending would begin to pick up during the second half of the year. But that may not be enough to push back against fiscal headwinds.

“The broader economy will ultimately then hold back consumer spending,” he said.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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