We got a straight-up ugly piece of US economic data yesterday: Consumer confidence dove several points in January.
Photo: Bloomberg, Business Insider
Why are consumers upset? Haven’t they heard that all the big fears are lifting?
The big worry is that it has something to do with the expiration of the payroll tax. People see they’re taking home less each weak; they get less confident. It wouldn’t be that weird.
And a new study that came out yesterday just happens to compound the fear.
The paper, from Grant Graziani, Wilbert van der Klaauw, and Basit Zafar, at the New York Fed (via WSJ) says that the payroll tax cut in 2011 had a much bigger economic boost than would have been anticipated:
This paper presents new survey evidence on workers’ response to the 2011 payroll tax cuts. While workers intended to spend 10 to 18 per cent of their tax-cut income, they reported actually spending 28 to 43 per cent of the funds. This is higher than estimates from studies of recent tax cuts, and arguably a consequence of the design of the 2011 tax cuts. The shift to greater consumption than intended is largely unexplained by presentbias or unanticipated shocks, and is likely a consequence of mental accounting. We also use data from a complementary survey to understand the heterogeneous tax-cut response.
Bottom line, the payroll tax cut of 2011 had a surprise positive shock.
Now we see that reversing and at the same time, consumer confidence has fallen.
It’s just one datapoint, but it needs to be watched.