A Bush-era payroll tax cut expired in 2012, and economists continue to worry about how it will impact consumer spending. After all, personal consumption continues to account for around 70 percent of GDP.
The January retail sales report reflected a modest increase in consumer spending. However, economists reminded us that most Americans probably didn't get their lowered paychecks until halfway through the month.
As such, February will be the first month where Americans will feel the full impact of the payroll tax hike.
But that's not the only thing that will affect the number
"The Census Bureau’s advance report on retail and food services sales will be the marquee event of the week in the US," said Societe Generale economist Brian Jones. "Our analysis suggests that nominal outlays on goods and services gathered considerable steam in February, but a gasoline-led jump in retail costs likely resulted in yet another modest uptick in real personal consumption expenditures (PCE) during the reference period."
Indeed, higher gas prices are bad news for non-gas spending.
However, any gas headwind will be at least partially offset by a tax refund tailwind.
In case you missed it, the last-minute dealing of the "fiscal cliff" forced the IRS to begin tax filing season two weeks late. As a result, Americans have been getting their tax refunds later than usual.
And UBS economist Kevin Cummins notes that the tax refunds have accelerated.
"The IRS has more than made up the initially sluggish pace of refunds issued," said Cummins in a new note to clients. "For the first 28 days of this year’s filing season (thru Mar 8) versus the 28 first days of last year’s season (thru Feb 23), refunds are running a cumulative $140 bil versus $109 bil last year."
So the February retail sales report will be impacted by the payroll tax hike, high gas prices, and delayed tax refunds.
But there's one more wrinkle: the sequester.
While the sequestration budget cuts won't directly impact February sales, the uncertainty and impact on consumer sentiment might.
"The Feb data have been impressive but I still think March data will be decisively slower," wrote Bank of America's David Woo in an email to Business Insider. "The Rasmussen daily consumer confidence is down nearly 10 points from mid-Feb and the impact of the sequester will start to show up in the next 2-3 weeks (CBO is forecasting 750K job looses this year from sequester implementation)."
So, even if Wednesday's February retail sales report is good, the March report will almost certainly be uglier.
We'll just have to wait and see.
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