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U.S. Spending Up Despite Tax Hike

Written By Brian Hicks

Posted March 12, 2013

It looks like the payroll tax increase hasn’t had much effect on domestic consumer spending.

Overall, Americans continue to save less and spend more on things like new automobiles and other commodities as household net worth figures shoot up, according to Bloomberg, riding on resurgent home values and stock indexes. Moreover, February saw another 246,000 jobs added to private payrolls, in yet another sign that the economy may indeed be bouncing back.

Bloomberg reports:

“A lot of things are going the right way,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, whose private employment forecast was closest to the February gain among economists surveyed by Bloomberg. “The labor market is picking up momentum. Businesses are seeing demand. More people working means more people will be spending money. To a certain extent, this neutralizes the effects” of higher taxes.

Indeed, it’s likely that this growth trend will continue and even strengthen as the initial shocks of the budget cuts recede. GDP is expected to rise about 2 percent annual average pace in late 2013, and yesterday, the S&P 500 Index was up 0.3 percent to close at 1,556.22 in New York.

Car sales seem particularly healthy; both General Motors Co. (NYSE: GM) and Ford (NYSE: F) expect sales to remain strong and, if anything, go up. A Ward’s Automotive Group report indicates that the annual sales rate was 15.3 million in February after January’s 15.2.

Even furniture sales are looking good. This is undoubtedly tied to the resurgent housing market.

What’s more important in the longer run, though, is that these disparate forces are coming together to exert a cumulative effect. Resurgent housing prices mean consumers are beginning to make decisions now rather than continue to rely on a rock-bottom market, and that means the number of home sales will go up. Homes need to be furnished—hence the improving furniture sales.

Overall sales health goes up, meaning businesses need to add workers and expand overall, which ultimately affects the crucial unemployment rate. Lowe’s Cos., for example, is ramping up store upgrades and is on a hiring spree, with nearly 10 new stores opening across the country just this year alone, as Bloomberg reports.

The latest Labor Department figures indicates an unemployment rate of 7.7 percent—the lowest in over four years. Bloomberg reports household wealth in Q4 was up to its highest in five years at $66.1 trillion. That is very near the pre-recession high of $67.4 trillion.

With consumer confidence and consumer spending on a distinct rise, it is reasonable to expect the momentum to continue or even gain. It’s all very interesting, considering that the payroll tax hike alongside the government’s raised taxes on the very rich made for the biggest drop in income in two decades. Overall, January saw incomes go down by 3.6 percent, just after they rose 2.6 percent in December of last year, reports MarketWatch.

It isn’t all good news, though. Despite spending and overall trends looking healthy right after these tax increases, there may be a longer-term downward pressure. Consumer spending on appliances and electronics dipped 0.8 percent over January; that is the first such decrease in three months. Typically, economic distress results in consumers opting not to go in for big purchases, but smaller ones remain more or less on track.

Also, gasoline prices are expected to keep rising, and the sequester’s influence has yet to really be felt. At the start of the month, the government began reducing spending by $85 billion across the board.

All these things taken together indicate that growth rate may not exceed 2.2 percent, the same rate as last year’s. Growth needs to be well above that in order to bring the unemployment rate down, MarketWatch reports.

A mixture of income drops and an anemic rise in consumer spending means that the average savings rate for Americans has fallen to 2.4 percent, down from 6.4 percent—a big decrease over five years.

Normally, consumers will take stock and rebuild savings if there is such a drastic drop. The problem is that the rebounding housing market and improving stock market is currently creating the illusion of wealth, even for seriously affected American consumers. The improving unemployment figures add to that effect, despite painfully slow improvements.


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