On Friday, Bloomberg reported on leaked emails between Wal-Mart executives describing February sales as a “total disaster” – the worst monthly start in at least seven years.
The executives cited the effects of the expiration of payroll tax cuts, which they believe are weighing on consumer spending.
However, there is at least one reason to believe that the news is a bit of a fluke.
As we noted on Friday, Miller Tabak economist Andrew Wilkinson suggested a link between the weak numbers and tax refunds (emphasis added):
Second is the delay to tax refunds due to year-end complications from the fiscal cliff. The IRS delayed the filing process to the end of January and as a result early filers accustomed to receiving refund checks are running behind schedule this year. According to a one source, tax refunds this time one year ago were running at $19 billion.
Perhaps Wal-Mart didn’t sell as many flat-screen televisions in February as they did a year ago on account of delayed filings and subsequent delays to refund checks.
Today, UBS economists led by Maury Harris put some numbers to that theory. They note that through the first two weeks of February, 2013 tax refunds total $55 billion – down 28 per cent from last year.
The chart below shows the difference.
Photo: UBS, US Treasury
Harris writes (emphasis added):
The weakness mainly stems from a delayed filing season this year. The IRS officially began the filing season on January 30 this year versus January 17 last year due to the changes in tax code as part of the fiscal cliff deal. There has only been roughly 10 days of refunds issued this year versus about 17 days in 2012. However, recently the pace of refunds has picked up. For the first 10 days of this year’s filing season (thru Feb 14) versus the 10 first days of last year’s season (thru Feb 6), refunds are running a cumulative $55 bil versus $37 bil last year.
Admittedly, that comparison is not perfect, but what appears to have been a headwind for the consumer in late-Jan/early-Feb now appears to be turning into a tailwind as refunds are picking up the last few days. According to the IRS: “Last year, the IRS issued more than nine out of 10 refunds to taxpayers in less than 21 days, and it expects the same results in 2013.”
According to Harris, “Tax refunds are an anticipated annual recurring event and thus are more likely to affect consumption than temporary swings in tax rates and gasoline prices.”
Jefferies analyst Daniel Binder has the same theory. In a note following the leak, he wrote:
Delayed tax refunds likely causing some temporary pain. While we have not yet conducted checks in February, our January checks indicated softness in the last week of the month. With the payroll tax increase and delay in tax refunds (more on that below) adding further pressure, it seems reasonable that Walmart sales could have fallen short of expectations so far this month. We suspect the same holds true for other retailers serving middle to lower income consumers as well.
Putting things into perspective… While the payroll tax increase is likely to create pressure on consumer spending all year long, it is important to not underestimate the significance of the delay in tax refunds. At February 3 (beginning of the retail month for most retailers) there were $22.4 billion fewer tax refunds y-y. To put that into perspective, that equates to 8.5% of February retail sales last year. Now imagine that hitting all in a week or two… the impact is much greater. We are convinced this early Feb weakness will reverse and the wrong thing to do now is panic with knee jerk selling on the broad group. Clearly not all tax refunds get spent, and our analysis is for illustrative purposes, but it helps put things into perspective.
More up to date numbers include $77.5 billion in tax refunds as of February 14 versus $55 billion last year, so there is still a $22.5 billion gap, but that is down from a $39.3 billion gap on February 6. The gap should continue to reverse through the tax filing season and shorter term we would expect to see some stabilisation in retail spending. For more detail, go to http://www.fms.treas.gov/dts/index.html
If that is the case, perhaps Wal-Mart will be pleasantly surprised with March sales figures.