When Congress allowed payroll taxes to rise at the start of 2013, ensuring that all American workers’ after-tax pay would fall (most by two percent), it was reasonable to worry that the consumer-driven economy would take a damaging blow.
February retail sales were released Wednesday morning and it’s hard to imagine how the numbers could have been stronger. Overall retail sales rose 1.1 percent in February, more than double the 0.5 percent gain analysts had expected. January retail sales data was revised upward, to an 0.2 percent gain from 0.1 percent. Even excluding volatile food and auto sales, the February number was up 0.4 percent, double the 0.2 percent forecast.
On one level, this is a shock: Consumers who are seeing smaller paychecks should, by all rights, be holding fast to their wallets. It was just a few weeks ago that we were all fretting over leaked internal Wal-Mart e-mails in which one executive pondered “Where are all the customers? And where’s their money?”
Well, it turns out (as Wal-Mart made clear in its earnings call shortly thereafter), they were just waiting a bit until they received their delayed tax refund checks. The underlying state of consumer spending seems to be strong.
But beyond what that tells us about the consumer, think about that in the context of other recent evidence. Friday’s jobs report was quite good, and it followed a series of solid jobs numbers. Employers didn’t sweat the fiscal cliff in December. They didn’t sweat the sequester in February. Housing market indicators—construction, prices, sales—are all pointing up.
Put it all together and it’s hard to escape the conclusion that the U.S. economy is finally starting to gain some traction. This fits with the story that what the economy really needed the last few years was to get through some of the headwinds holding it back, namely housing and debt-pinched consumers. Some credit also may be due to the Federal Reserve; its new quantitative easing policies announced in September may be starting to have an impact. Now that housing is supporting growth and debt levels have been pared down, there seems to be some underlying resilience in the economy that even a dysfunctional political system can’t stop.
We still don’t know what impact the sequestration that went into effect March 1 will have on the broader economy; particularly in areas heavily dependent on government spending (ahem, Virginia), it could depress incomes and overall economic activity.
But the retail sales numbers Wednesday are the latest piece of evidence that just maybe, the U.S. recovery has some hidden resilience that could bode better times ahead.