Wednesday 13 February 2013

U.S. retail sales growth slows after tax hike

Consumer purchases in January edge up 0.1%

By Jeffry Bartash, MarketWatch
WASHINGTON (MarketWatch) — U.S. consumers increased their purchases of retail goods in January at a slower pace, suggesting that a beginning-of-the-year tax hike partly restrained spending.
Taxes on working Americans went up 2% last month after the end of a tax break put in place two years ago to spur the economy. The nation’s richest citizens were also required to pay higher tax rates.
The increase in taxes appeared to have a mild dampening effect. Retail sales rose a scant 0.1% last month following a 0.5% gain in December, the Commerce Department said Wednesday. Sales rose a somewhat faster 0.2% excluding the large auto sector.
“Normally people reduce their savings when their tax rates go up,” said Steve Rick, senior economist at Credit Union National Association in Wisconsin. “It looks like consumers did drop their spending a bit. It may be signs of stress on lower and middle-income people. They don’t have much savings to begin with.”
Economists surveyed by MarketWatch expected retail sales to be unchanged overall and up 0.1% minus autos. The auto sector, which generates about one-fifth of total sales, is prone to large monthly swings that can distort broader retail trends.
The retail report had little impact on U.S. markets. In recent trades Wednesday, stocks were mostly higher.
Consumer spending accounts for as much as 70% of the U.S. economy and sales at retailers represent about one-third of that consumption. So retail sales are a good proxy for how fast the economy is growing, though economists look at longer-term trends because the monthly data is volatile and subject to sharp revisions.
Still, softer retail sales could renew questions about whether the government’s actions are weighing on the economy. The higher taxes imposed in January could be followed in March by an $85 billion reduction in federal spending via a process known in Washington as the “sequester.” The cuts could hit defense companies particularly hard and trigger widespread layoffs.
What’s more, some economists say the bigger tax bite out of paychecks probably hasn’t shown its full charge. Many people don’t change their spending habit right away after changes in tax rates.
Higher gas prices are another concern. The average price at the pump has jumped to $3.60 from $3.30 for a regular gallon of gas since the start of the year. That depresses sales for other retail goods.
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Yet the U.S. is still expected to remain on a modest growth path despite the headwinds in Washington. A steady pace of hiring, more business investment and improved exports should underpin growth, economists say, with stronger gains coming later in the year.
“That will help offset the increase in payroll taxes,” Rick said.

Inside the report

Sales in January rose the fastest for general-merchandise retailers, department stores and Internet and mail-order firms. Spending rose about 1% in each category.
Sales also rose slightly at gas stations, suppliers of building materials and stores that sell appliances and electronics.
The cash registers rang less at auto dealerships and stores that market home furnishings, clothing and personal-care items.
Auto and parts sales dropped 0.1% last month, but they’ve jumped 8% over the past year. Only nonstore retailers — Amazon, Land’s End and so forth — posted stronger sales in the past 12 months. Sales in that category have rocketed 15.7% higher.
On the flip side, spending at health and personal-care stores has dropped 0.9% in the past 12 months while general-merchandise retailers saw their sales retreat 1.0%. Economists say the declines might reflect heavy discounting, especially at department stores.
In December, the rise in retail sales was unrevised. November’s increase was moved up a notch to 0.5%.
Over the past 12 months, retail sales have risen an unadjusted 4.4%, more than twice the rate of consumer inflation.
Jeffry Bartash is a reporter for MarketWatch in Washington.
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