Confidence among American households unexpectedly fell to a one-year low in January, as higher payroll taxes create a risk that the biggest part of the economy will slow in early 2013.
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment dropped to 71.3, the lowest since December 2011, from 72.9 the prior month. The gauge was projected to rise to 75, according to the median forecast in a Bloomberg survey.
A boost to confidence in the second half of 2012 from a pickup in job growth has evaporated, just as lawmakers in Washington remain divided about raising the debt ceiling and cutting government spending. Discounters including Target Corp. (TGT) are trying to lure shoppers with year-round promotions as households brace for smaller paychecks due to a two percentage- point increase in payroll taxes.
“The economy is growing at a tepid rate, employment is growing at a tepid rate and consumer confidence is measly,” said Kevin Harris, chief economist at Informa Global Markets in New York, whose projection of 72 for the Michigan index was closest in the Bloomberg survey. “Everybody took a two percentage-point pay cut and that is not going to help.”
Stocks closed at a five-year high as investors weighed prospects for a short-term increase in the debt ceiling. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,485.98 at the close in New York.
Another report today showed that New York and New Jersey led payroll gains in December as the states rebounded from superstorm Sandy. Of the 27 states showing stronger employment, New York was at the top of the pack with a 35,100 increase, followed by New Jersey with 30,200, according to the Labor Department.
The dominance of the two states indicates that the rebound from the storm that crippled the Northeast in late October and early November had some effect on December U.S. payroll gains. Job growth averaged 160,000 a month in the second half of 2012, up from 146,000 in the first six months.
Elsewhere, China’s economic growth accelerated for the first time in two years as government efforts to revive demand drove a rebound in industrial output, retail sales and the housing market.
Estimates for the Michigan confidence measure ranged from 70 to 84, according to the Bloomberg survey. The index averaged 64.2 during the last recession and 89 in the five years before the economic slump that began in December 2007 and ended in June 2009.
The figures are in line with Bloomberg’s Consumer Comfort Index, which dropped last week to a three-month low, reflecting a fourth straight decline in the buying-climate gauge.
The Michigan index of expectations six months from now, which more closely projects the direction of consumer spending, dropped to 62.7, the lowest since November 2011, from 63.8 the prior month. Household purchases account for about 70 percent of the economy.
The measure of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, decreased to a six-month low of 84.8, from 87 in December.
While Americans took comfort in resolution of the so-called fiscal cliff, in which lawmakers averted income-tax increases on 99 percent of households, payroll taxes went up. As part of its budget agreement on Jan. 1, Congress agreed to let the tax, used to pay for Social Security benefits, return to its 2010 level of 6.2 percent from 4.2 percent. That reduces the paycheck by about $83 a month for someone who earns $50,000.
“Things like increases in payroll taxes are not a positive from my perspective,” Howard Levine, chief executive officer at Family Dollar Stores Inc. (FDO), the second-largest U.S. dollar-store chain, said on a Jan. 3 earnings call. “What I think happens is there will be some further impact to our core customer as a result of some of these tax increases. But I also think we’re positioned very nicely for a trade-down customer.”
Target, the second-largest U.S. discount retailer, said earlier this month that it plans to match the prices year-round charged by e-commerce sites of Amazon.com Inc., Wal-Mart Stores Inc., Best Buy Co. and Toys “R” Us Inc. in a bid to boost sales.
The new policy combines Target’s holiday-season price policies into one year-round and easy-to-use system, the Minneapolis-based company said in a statement. Target’s stores will also match the prices of goods found on its own website, it said.
Still, consumers have benefited from rising home values and cheaper fuel prices. A gallon of regular gasoline at the pump averaged $3.29 nationally yesterday, down from a recent high of $3.87 in September, according to AAA, the biggest U.S. motoring group.
Automobile sales, meantime, have been a bright spot as consumers take advantage of cheaper borrowing costs. Motor vehicle purchases are expected to grow in 2013 by 3 percent, Jim Lentz, U.S. sales chief for Tokyo-based Toyota Motor Corp. (7203), said at an industry conference this week.
“The U.S. economy is expected to continue to improve,” Lentz said. “Consumers appear to be more upbeat about the business and labor conditions.”
The debt limit has been periodically raised since its creation in 1917, when Congress and President Woodrow Wilson authorized the Treasury to issue long-term securities to help finance entry into World War I. Since 1960, Congress has raised or revised the limit 79 times, including 49 times under Republican presidents, according to the Treasury Department, noting the U.S. never has defaulted on its obligations.
The last time Congress fought over raising the ceiling, Obama signed an increase on Aug. 2, 2011, the day that Treasury warned U.S. borrowing authority would expire. Standard & Poor’s cut the nation’s credit rating.
Still, U.S. Treasury bond investors -- who most directly bear the risk of any government default -- haven’t shown alarm over political fights ultimately resolved in Washington. Yields on 10-year U.S. Treasury notes declined after Aug. 5, 2011, the day of the S&P downgrade, and continued to fall.
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