WASHINGTON – Americans barely spent more last month at retail businesses and restaurants after higher taxes cut their paychecks. The small increase suggests consumer spending may be weak in the January-March quarter, which could hold back economic growth.
Retail sales ticked up 0.1 per cent in January from December, the Commerce Department said Wednesday. That follows a 0.5 per cent increase in December and is the smallest in three months.
Sales fell at auto dealerships, clothing stores and furniture stores. The declines came after big gains in each of those categories in December. Sales rose last month at home-improvement stores, gas stations and online retailers.
So-called core retail sales, which exclude autos, building materials, and gas stations, ticked up 0.2 per cent. That’s down from 0.6 per cent in December. Economists pay close attention to core sales because they strip out the most volatile categories.
The retail sales report is the government’s first look at consumer spending, which drives 70 per cent of economic activity.
Nearly all working Americans are taking home less pay this year. Congress and the White House allowed a temporary 2 percentage point cut in Social Security taxes to expire last month. That means a person earning $50,000 a year will have about $1,000 less to spend in 2013. A household with two high-paid workers will have up to $4,500 less.
Economists were mildly encouraged that spending rose at all after the tax increases took effect. Many expect that spending may pick up later this year as hiring improves.
“No surprise that consumer spending eased a bit in the New Year,” Jennifer Lee, an economist at BMO Capital Markets, said in a note to clients. “Look for spending to pick up as the year progresses, supported by stronger job growth.”
Top-earning households are also paying higher income taxes this year. President Barack Obama and lawmakers agreed to prevent income taxes from rising on most Americans. But their deal to avoid the fiscal cliff allowed income taxes to rise on individuals earning $400,000 a year and couples earning $450,000 a year.
Michael Feroli, an economist at JPMorgan Chase, said the higher taxes could weigh on spending for up to six months.
“Even so, it is nice to see that consumers didn’t stumble out of the blocks,” he said in a note to clients.
The Social Security tax increase was a key reason the Conference Board’s index of consumer confidence plummeted last month to its lowest level in 14 months. That survey was taken early in the month, when most Americans were discovering their smaller paychecks.
But a separate survey taken later in the month by the University of Michigan suggested consumers weren’t quite as dismayed, possibly after absorbing the impact of the tax increase.
Better hiring and rising prices for stocks and homes may boost consumer confidence and spending in the coming months.
Employers added an average of 200,000 jobs a month in the final three months of last year, the Labor Department said earlier this month. That was up from just 150,000 in the preceding three months.
And some retail store chains reported healthy sales gains last month, suggesting that at least some consumers kept shopping even after the tax cut kicked in. Some of the gains likely reflected healthy holiday discounts.
Overall, consumer spending grew at a faster pace in the final three months of last year than in the preceding quarter. Still, steep cuts in defence spending and slower company restocking weakened the economy.
The government said last month that the economy contracted in the October-December quarter at an annual rate of 0.1 per cent.
But economists expect that figure will be revised in the coming months to show a small increase, after more data about last quarter has been reported. Economists at Barclays Capital estimate the economy expanded 0.5 per cent in the fourth quarter.
Growth will likely pick up a bit in the January-March quarter to an annual rate of 1.5 per cent, analysts forecast. That’s better than the fourth quarter but below last year’s expansion of 2.2 per cent.