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Consumers Blink, Retail Sales Fall

A minor mystery has been solved.

Economists have been wondering how it can be that taxes went up at the start of the year - cutting just about everybody's take-home pay - yet spending went up too. Now they have the answer: Spending didn't go up after all.

[READ: More Than Half Say Taxes Don't Affect Their Spending]

The latest retail sales data shows that spending in March fell by 2.8 percent year over year, the worst performance since the recessionary year of 2009. More than that, sales growth in January was revised from positive to negative, and growth in February was revised lower. So in two of three months so far this year, retail sales have fallen.

That's roughly what economists expected to happen following the tax hikes on January 1 and other troubling developments, such as the government spending cuts that went into effect March 1. When taxes reduce disposable income or shoppers become worried about the future, it's usually inevitable that they spend less.

There have been some countervailing forces that might explain unusually buoyant consumers. The end of the housing bust and the upturn in home values have made people feel better off about their biggest asset. Recent highs in the stock market also convey the sense that something, at least, is going right. Plus, consumers have been saving less to help sustain spending.

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But consumers aren't as resilient as it seemed just a few weeks ago, which may weaken the outlook for the next few months.

"The consumer is not going to be able to sustain strong spending," predicts economist Joel Naroff. "Job growth has been mediocre, wage gains remain largely nonexistent and the cumulative impact of the tax increases and government spending cuts should slow income growth."

Consumers themselves are starting to feel jittery. In the latest consumer sentiment survey by the University of Michigan, confidence dropped by much more than economists had expected, to the lowest level since last July. That follows a similarly large drop in the Conference Board's confidence index in late March.

[ALSO: Consumer Confidence All Over the Map]

The implications for the broader economy are significant. Many Wall Street analysts have been predicting a stock-market correction of 5 or 10 percent, yet the market has continued to hit new highs. At some point, as worrisome economic data piles up, the legs could come out from under the stock market.

If there's a silver lining, it's that the Federal Reserve may prolong its easy-money policies as signs of an economic slowdown intensify. Many analysts credit the Fed's policies for the four-year stock market rally and the turnaround in the housing market, which is why stocks tend to fall amid rumors that the Fed may change course. The more skittish consumer get, however, the more determined the Fed will be to keep the money flowing.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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