Good news! Consumers didn’t ratchet back their spending in January after the payroll tax hike

February 13, 2013

The second major piece of evidence is in on how the 2 percentage point increase in payroll taxes that went into effect January 1 affected consumer behavior. And the results are: Eh, not so much.

Retail sales rose 0.1 percent in January, the Commerce Department said Wednesday morning, which is what analysts had expected and the third consecutive month of gains. Excluding volatile autos and gasoline, sales rose 0.2 percent. The strongest gains were in general merchandise (think Wal-Mart and Target) and department stores, which were up 1.1 and 1 percent, respectively.

Shop, shop like there's no tomorrow. (Victor J. Blue/ Bloomberg)
Shop, shop like there's no tomorrow. (Victor J. Blue/ Bloomberg)

While the results are hardly evidence of a new surge of spending by American consumers, there is some consolation in the fact that Americans didn’t react to a fall in their after-tax paychecks by panicking and pulling back on spending abruptly. Combined with decent job creation numbers to start the year and other data on business activity, the economy seems to be holding up OK in 2013 despite the tax increases implemented as part of a deal to resolve the “fiscal cliff” at the end of 2012.

A temporary two percentage point reduction in payroll taxes first implemented at the start of 2011 was allowed to expire, meaning most workers’ paychecks fell by that much. And income tax rates for households making over $450,000 increased permanently as part of the fiscal cliff deal.

At the same time, just because spending didn’t collapse immediately in the wake of the tax increases doesn’t mean consumers are in the clear. The tax increases will decrease disposable income throughout 2013 and beyond, which could put pressure on their spending levels. At the same time, though, rising stock market and home values could give spending a boost through “wealth effects.” The question economists are wrestling with is which force will prove stronger.

And economists note that the 0.1 percent gain in January retail sales, while still positive, is a deceleration from stronger gains in November and December. “This represents a clear slowdown in underlying spending growth relative to 0.7% gains in both November and December and provides one of the first indications of how the tax increases enacted under the fiscal cliff deal may impinge consumer spending,” said Peter Newland, an economist at Barclays Capital, in a report.

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Ezra Klein · February 13, 2013