Don't Get Excited Yet — That Payroll Tax Hike Will Slam Us In The Next Few Months

Empty Wallet

Retail sales climbed by 0.1 per cent in January, which was right in line with expectations.

This is largely being taken as good news because this was the first month that consumers got his with the payroll tax hike.  In other words, it was a good thing that the report wasn’t much worse than expected.

However, a handful of economists warn that the impact will likely have a more pronounced effect in future reports.

“[T]he tax hikes and latest leap in gasoline prices (which will leave households with less cash to spend on other items) could hit spending harder in February and March,” says Paul Dales of Capital Economics.

High Frequency Economics’ Jim O’Sullivan also thinks we shouldn’t get too excited about positive growth in today’s report.  Like Dales, O’Sullivan thinks the impact of the tax hike could show up in a future report.  From a note earlier this week.

The apparent strength in retail sales in January should not be viewed as evidence that the payroll tax hike will have no impact: With the tax reducing disposable income by 0.9%—equivalent to 0.7% of GDP—and many individuals living paycheck to paycheck, there clearly will be an impact on growth. The CBO has estimated a 0.5-point hit to GDP in 2013; that number looks reasonable to us.

So why the apparent rise in spending in January? In part, the pattern reflects lags, with consumers adjusting their spending over several months. The impact on spending was not immediately obvious when payroll taxes were cut two years ago, either. In part, it reflects the vagaries of January data, with spending down sharply from December before seasonal adjustment. Also, some of the spending in January is a product of gift cards purchased and received in December. However, part of the pattern likely also reflects the spending power being generated by an increasingly healthy labour market recovery.

Here’s O’Sullivan’s chart:

retail sales

Photo: HFE

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.