Bad news. The entire benefit from the payroll tax holiday will be wiped out by April, thanks to soaring food and energy prices, says BofA/ML.
In the United States, the job market is showing increasing signs of life. In March, payrolls rose by about 200,000 for the second month in a row. For the quarter as a whole, our US economics team points out that aggregate hours worked rose at a 2.0% annual rate. Adding in a percentage point of productivity growth to this number, the rough supply-side measure of GDP growth comes to 3.0%. On the
back of this improving outlook, markets have been very sensitive to even the smallest hint of an exit . However, consumption is looking softer despite the payroll tax cut. The 2% cut in the social security tax started adding about an $8bn per month tailwind to disposable income starting in January.
Unfortunately, that tailwind is quickly being displaced by mounting food and energy price headwinds. As Chart 23 shows, our US economics team thinks the cumulative rise in food and energy prices this year will completely cancel out the tax cut by April.
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