Payroll Tax Impacts Consumer Spending

cashConsumer confidence began to improve in January, according to the Thompson Reuters University of Michigan Consumer Confidence Survey. The survey followed the uncertainty generated by the fiscal crisis. "So far the rise has been extremely small, as consumers were still much less optimistic in January than several months ago," the report said.

"Importantly, the payroll tax increase has had a significant impact on lower income households, as nearly the entire January gain was due to households with incomes above $75,000. Concerns about disposable incomes have dominated consumer confidence for more than four years," the influential survey says.

"The key to rising consumer spending is whether gains in employment are able to offset higher payroll taxes. Overall, consumer total expenditures adjusted for inflation will grow by 1.8 percent in 2013, just below the 1.9 percent in 2012," the survey notes.

The survey says that personal finances diverge between income groups. “The end of the payroll tax holiday  had a significant impact on consumer confidence, especially among lower income households. When asked to describe recent changes in their financial situation, declines in disposable incomes were much more frequent among households with incomes below $75,000. Indeed, higher income households much more frequently mentioned income gains in January than in the December survey. While consumer spending will slow in 2013, spending by higher income households, especially on interest sensitive purchases of  homes, vehicles and household durables, will keep consumer spending slowly expanding in 2013," according to Richard Curtin, chief economist.

The personal finances of consumers has weakened considerably compared with the closing months of 2012, the survey notes. The January decline was due to households with incomes below $75,000 reporting more frequent losses than could be offset by upper income households. Indeed, just 13 percent of lower income households reported gains in disposable income in January (down from 21% in December) compared with 38 percent of upper income households (up from 25% in December). Overall, income gains expected in 2013 were smaller than the expected inflation rate, the survey notes.

More consumers anticipated that economic conditions will improve rather than worsen in 2013, the survey notes. "While consumers are less fearful of a renewed downturn during the year ahead, nearly six-in-ten expected a downturn sometime in the next five years in the January survey. On the employment front, consumers do not anticipate a significant decline in the overall unemployment rate during 2013, although they still anticipate a slowly falling rate."

The Consumer Sentiment Index reported was 73.8 in the January 2013 survey, up from 72.9 in December, but just below last January’s reading of 75.0. The two components of the Index moved in opposite directions. The Expectations Index posted a gain to 66.6 in January from 63.8 in December, while the Current Economic Conditions Index declined to 85.0 in January from 87.0 in December.



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