Despite some recent reports of disappointing holiday retail sales, most measures of consumer spending has been remarkably resilient, especially compared to businesses who are on hold until they get a better sense of what taxes will look like next year.
“Why have consumers continued to spend in the face of the “fiscal cliff” while businesses appear significantly more apprehensive?” asks Brett Ryan of Deutsche Bank’s U.S. economics team.
It’s pretty simple: they’re making more money.
Ryan points to witholding tax receipts, a metric favoured by Deutsche Bank:
One reason consumers have remained resilient is that income growth continues to be positive. Withholding tax receipts provide critical information on the underlying income trend. Tax receipts are one of our favourite metrics of economic activity, because people do not pay tax on phantom income. Thus, unlike most economic data series, tax receipts are never revised. Furthermore, the data are timely since they are released daily from the Treasury Department (with a one-day lag). Recently, the growth in tax receipts corroborates accelerating income creation. Last quarter, tax withholdings grew 3.2% from their year-earlier level, compared to 3.4% in Q2. While the pace through Q3 was modest, households are still generating positive nominal income gains. In fact, the latest data for the current quarter show receipts growing at a healthy +8.0%. (See chart below.) This is likely why consumer spending has not dropped off as much as business spending has over the past six months. By no means is the economy booming, but continued labour income growth similar to the current pace suggests that a recession is not imminent. To be sure, this assumes that a reasonable solution to the “fiscal cliff” is reached within the relatively near term.
Photo: Deutsche Bank
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