Tax Inflow Shows Consumers in U.S. May Spend More Than Estimated: Economy
Rising tax receipts show household incomes in the U.S. are growing faster than currently estimated, and by enough to sustain consumer spending, according to economists like Joe LaVorgna.
Tax revenue from employee pay was up 4.8 percent in the third quarter from a year earlier after adjusting for changes in withholding rates over the past few years, said LaVorgna, who is the chief U.S. economist at Deutsche Bank Securities Inc. in New York. By contrast, the Commerce Department’s figures show wages and salaries climbed 2.9 percent over the same period.
Taxes more accurately reflect the state of the job market because they are not subject to revision and workers don’t pay the Internal Revenue Service on “phantom” wages, LaVorgna said in a note to clients yesterday. The revenue numbers also mean the latest readings on savings are too low, eliminating another obstacle to a pickup in household purchases, he said.
“People say consumer spending can’t be sustained because the savings rate is falling, but they have it wrong,” LaVorgna, a former economist at the Federal Reserve Bank of New York, said in an interview yesterday. “Since we know income is understated, by default the savings rate is understated. The consumer is going to stay sustainably stronger than what I think the consensus believes.”
The savings rate was 3.5 percent in October compared with 5.3 percent a year earlier, according to figures from the Commerce Department. It sank to an almost four-year low 3.3 percent in September.
Stocks were little changed today, erasing earlier declines, as retailers and financial companies rallied and European officials weighed measures to ease the debt crisis ahead of a summit this week. The Standard & Poor’s 500 dropped 0.1 percent to 1,256.75 at 1:11 p.m. in New York.
German industrial production rose more than economists forecast in October as factories weathered the debt turmoil that hurt output in other countries across the region and threatens to trigger a recession. Production climbed 0.8 percent from September, when it dropped 2.8 percent, the Economy Ministry in Berlin said today. Separate reports showed industrial output declined in the U.K., Italy and Norway.
China’s Commerce Ministry said today that rising costs and a slowdown in overseas demand may put “severe” pressure on its exports next year. Higher wages, along with a jump in land and raw-materials prices and a stronger yuan are restraining shipments, the Commerce Ministry said. While China can achieve export gains as long as Europe’s crisis doesn’t deepen, it will need to focus on strengthening links with emerging markets, Wang Shouwen, head of the foreign trade department, said at a briefing in Beijing.
Revisions to the monthly U.S. payroll counts are another sign the American job market is stronger than the initial data suggest, LaVorgna said. In the five months to October, payrolls have been revised up by an average 49,000 a month from their initial readings, he said.
Additionally, a divergence between the two surveys conducted by the Labor Department to calculate the jobless rate and payrolls indicates employment may be stronger, LaVorgna said. Figures from the survey of households show the economy has created 1.28 million jobs in the past four months, more than twice the 534,000 registered in the separate count of employers.
His calculations show that as of the third quarter, the level of wages and salaries is understated by almost $125 billion, a “substantial” difference, LaVorgna wrote in the research note. Over an entire year, that is “worth nearly two percentage points on the saving rate,” he said.
“It’s clear that consumers have dug into their savings to finance consumption, but I don’t think they’ve dug as deep as the data suggest,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “Typically, when the numbers get revised, the government finds more income than has been reported. Down the road, I think we’ll look back and find households had more income than we think they do now.”
Consumer spending grew at a 2.3 percent rate in the third quarter after increasing at a 0.7 percent pace in the prior period and 2.1 percent in the first three months of the year, according to data from the Commerce Department.
Since then, reports indicate the gains are continuing this quarter. Retail sales in October rose 0.5 percent after a 1.1 percent increase the prior month that was the best reading since February, the Commerce Department said on Nov. 15.
Purchases at Saks Inc. (SKS), the luxury department store based in New York, increased 9.3 percent in November from the same month last year, exceeding the estimate of 5.9 percent, the company said in a statement Dec. 1.
“What you saw on Black Friday is people were excited early,” Steve Sadove, chief executive officer of Saks, said in a Bloomberg Television interview, referring to the day after the Thanksgiving holiday, which traditionally kicks off the holiday spending period.
Auto sales rose to a 13.6 million unit annual pace in November, up from a 13.2 million rate the prior month and the highest level since August 2009, according to industry data.
Taking into account the better-than-forecast sales figures, the economy is growing at about a 3 percent annual rate this quarter from a previously projected 2.5 percent pace, according to a forecast by Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Gross domestic product rose at a 2 percent rate last quarter.
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