Monday, March 25, 2013

A closer look at consumer spending

“One often talks about ‘the consumer,’ but there’s no such thing. As a rule of thumb, the top 20% of income earners account for about half of personal income and half of consumer spending. Spending for the top 20% of households shouldn’t be affected much by the payroll tax increase, delayed tax refunds, or higher gasoline prices. Moreover, stock market wealth gains will add somewhat to spending.

“Note that the stock market wealth effect on spending is relatively small, but a large enough change in wealth can certainly move the needle on spending. The wealth effect is also asymmetric. A 20% rise in stock market wealth may add about 0.6% to spending, while a 20% decline might reduce spending by about 2.0%.

“For the other 80%, the payroll tax increase and higher gasoline prices matter a lot. Recall that, for a household making $60,000 per year, the payroll tax increase reduced spending by $100 per month. The payroll tax reduction of the last few years was perhaps the most unadvertised tax cut in history. Most people were unaware that the cut had occurred, but the added take-home pay helped support consumer spending growth.

“Many workers were unaware that the payroll tax rose in January. Hence, the impact on consumer spending is likely to show up with a lag. In addition, higher gasoline prices normally have a lagged effect on spending. Gasoline prices may be falling now, but the full impact of the rise in February has yet to be felt.”  [Dr. Scott Brown, Raymond James Financial, 3/22/13]

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