Sustained rise in consumer spending reflects positive trend for debt, jobs, more
WASHINGTON — This year got off to a sour start for U.S. workers: Their pay, already gasping to keep pace with inflation, was suddenly shrunk by a Social Security tax increase.
Which raised a worrisome question: Would consumers stop spending and further slow the economy? Nope. Not yet, anyway.
On Friday, the government said consumers spent 3.2 percent more on an annual basis in the January-March quarter than in the previous quarter — the biggest jump in two years. And in a report Monday, the government said consumers increased their spending in each month, by 0.2 percent in March, 0.7 percent in February and 0.3 percent in January.
The spending increases highlighted a broader improvement in Americans' financial health that is blunting the impact of the tax increase and raising hopes for more sustainable growth.
Consumers have shed debt. Gasoline has gotten cheaper. Rising home values and record stock prices have restored household wealth to its pre-recession high. And employers are steadily adding jobs, which means more people have money to spend.
“No one should write off the consumer simply because of the 2 percentage-point increase in payroll taxes,” said Bernard Baumohl, chief economist at the Economic Outlook Group. “Overall household finances are in the best shape in more than five years.”
Spending weakened toward the end of the January-March quarter. Spending at retailers fell in March by 0.4 percent, the worst showing in nine months. And more spending on utilities accounted for up to one-fourth of the increase in consumer spending in the January-March quarter because of colder weather, JPMorgan Chase economist Michael Feroli said.
Higher spending on utilities isn't a barometer of consumer confidence the way spending on household goods, such as new appliances or furniture, would be.
Americans also saved less in the first quarter, lowering the savings rate to 2.6 percent from 3.9 percent in 2012. Economists say that was likely a temporary response to the higher Social Security tax, and most expect the savings rate to rise back toward last year's level.
That could limit spending.
But several longer-term trends are likely to push in the other direction, economists say, and help sustain consumer spending. Among those trends:
• Wealth is up
Home prices rose more than 10 percent in the 12 months that ended in February. And both the Dow Jones industrial average and Standard & Poor's 500 stock indexes reached highs in the first quarter. Americans have recovered the $16 trillion in wealth that was wiped out by the Great Recession. Economists estimate that each dollar of additional wealth adds about 3 cents to spending. That means last year's $5.5 trillion run-up in wealth could spur about $165 billion in additional consumer spending this year. That's much more than the $120 billion cost of the higher Social Security taxes.
“The resilience in spending, despite increased taxes, suggests that rising household wealth is providing an offset” to higher taxes and spending cuts, says James Marple, an economist at TD Bank.
• Debt is down
Household debt equals 102 percent of after-tax income, down from a peak of 126 percent in 2007. That's almost back to its long-term trend, according to economists at Deutsche Bank. And households are paying less interest on their debts, largely because of the Federal Reserve's efforts to keep borrowing rates at record lows. The percentage of after-tax income that Americans spent on interest and debt payments dropped to 10.4 percent in the October-December quarter last year. That's the lowest such figure in the 32 years that the Federal Reserve has tracked the data.
• Jobs are up
Employers have added an average of 188,000 jobs a month in the past six months, up from 130,000 in the previous six. Job gains slowed in March to only 88,000. But most economists expect at least a modest rebound in coming months. And layoffs sank to a low in January. Fewer layoffs tend to make people feel more secure in their jobs and more willing to spend.
• Gas prices are down
Gasoline prices have fallen in the past year and are likely to stay low. Nationwide, the average price of a gallon of gas has dropped 28 cents since this year's peak of $3.79 on Feb. 27. Analysts expect gas to drop an additional 20 cents over the next two months. Each 10-cent drop over a full year translates into about $13 billion in savings for consumers.
• Loan costs are down
Lower interest rates have enabled millions of Americans to save money by refinancing their mortgages. Mortgage giant Freddie Mac estimates that in the fourth quarter of 2012, homeowners who refinanced cut their interest rate by one-third, the biggest reduction in 27 years the agency has tracked the data. On a $200,000 loan, that means $3,600 in savings during the next 12 months.Some economists note that the Social Security tax cut didn't spur much more spending when it first took effect at the start of 2011. The tax cut gave someone earning $50,000 about $1,000 more to spend each year. A household with two high-paid workers had as much as $4,500 more.
Despite the tax cut, Baumohl notes that consumer spending rose only 2.5 percent in 2011 and 1.9 percent in 2012. In the 10 years before the recession began in December 2007, the average annual spending increase was 3.4 percent.
And a study by the Federal Reserve Bank of New York found that consumers spent only 36 percent of the increased income that resulted from the tax cut. The rest went to paying down debt or to savings.
Because the tax cut didn't boost spending that much, its expiration may not drag it down much, either.
Economists say temporary tax cuts are often ineffective because many consumers assume that the tax breaks will eventually disappear. So they don't ramp up spending in response.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Tesla home battery at $7K, partnered with rooftop solar system, may help reduce power bills
- Consistency keeps Cellone’s Bakery customers coming back
- EPA to release biofuels proposal by June 1
- With higher student debt than ever, millennials rely on support from parents
- Cuba’s dairy industry, once touted as a success, is struggling
- Charter Communications makes offer for Time Warner Cable
- Shareholder vote causes ATI to review executive pay packages
- Murray Energy expects to lay off as many as 1,800 more
- AT&T evolves beyond phones
- Financial planning for disabled people a little-tapped field
- Parent of Lane Bryant, Justice to buy owner of Ann Taylor for $2B