GOLDMAN: Here’s How You'll Know When Tax Hikes Are Starting To Hurt Consumers

Sven Jari Stehn and David Mericle of Goldman Sachs have a new note out that outlines how the firm will attempt to track the effects of higher taxes on consumption in real-time.

Goldman expects that the tax increases (via the end of the payroll tax holiday) will be a “major headwind” for the economy in 1H 2013, but admits that there is “considerable uncertainty about the scale and timing of the effect on consumption.” The firm projects consumption growth of 1.0 per cent in Q1, which picks up slightly to 1.5 per cent in Q2.

The problem is that economic data is incredibly difficult to track in real-time, because of the time lag between the period for which the data is collected and the date on which it is released. For example, consumer spending for January will be released on March 1.

The note includes a chart on which indicators Goldman will pay attention to as well as the release date for each data series. These indicators are either daily data, consumer confidence surveys, or hard consumption data:

Goldman Indicators of Consumer Spending

Photo: Goldman Sachs

 Goldman has a model which allows it to see the “goodness of fit” – in essence, how much the daily data and confidence surveys analysed are able to predict consumption. The firm has found that the model’s r-squared reaches 0.5 40 days after the start of the month, after auto sales and same-store sales are released. This means that on February 10, Goldman’s model will be able to explain 50 per cent of January’s consumption volatility:


Goldman Goodness of Fit

Photo: Goldman Sachs

Obviously, the model isn’t perfect, and can only explain 70 per cent of consumption volatility in a given month before the actual release of consumer spending.

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