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Payroll Tax Increase Will Impact Retail

25 January 2013 in Trading Ideas

Congress may have averted the fiscal cliff that threatened the country last month. But it came at the price of a drop in take-home pay for millions of Americans, one that is expected to have an immediate effect on shopping habits.

The first paychecks of 2013 showed a payroll tax increase of two percentage points, as Congress let a temporary decrease in the tax expire. (The rate returned to 6.2% from its temporary level of 4.2%.)

For most working families, that increase was enough to offset whatever wage gains they made last year. And families are tightening their belts in response. A study by the Federal Reserve Bank of New York estimates that a household making $50,000 a year will cut its spending by $710 in 2013 to compensate for its declining income.

An even higher estimate came from Roberton Williams, economist with the Tax Policy Center in Washington, who said the average American household will have $18 to $20 less to spend each week, working out to as much as $1,000 for the year.

Some economists who have been surveyed about the issue are expecting that retail sales could drop by as much as 1.2% in the first quarter as a result. The retailing industry is certainly expecting a fall-off; a third of surveyed mall managers reported that customers were already cutting back on spending in the first weeks of 2013.

The lower the income, the worse the hurt will be. “The people at the lowest incomes are going to be the most stretched, the least able to take it out of savings and sustain their spending pattern,” says Joel Naroff, a household economist.

That could well end up benefiting discount retailers. Retailing forecaster Dan Hess suggested as much, explaining that the tax increase will force millions of consumers to “trade down” to less pricey brands and retailers. Many of those companies can be found in the Discount Nation motif, which is available for your review.

Naroff believes that retail operations like Walmart and Target could see an increase not only in grocery purchases, but also in generic brands — at the expense of over brand-name products.

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