American consumers, who kept shopping through rising fuel costs and delayed tax refunds, will probably continue buoying the world’s largest economy as these hurdles dissipate.
After reaching a four-month high in February, gasoline prices have retreated in March at a time when they typically rise. Cash returns from the Internal Revenue Service, held up when an agreement to avert the fiscal cliff came at the last minute, have almost caught up to last year’s pace.
“Headwinds in February were temporary,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “They are going to be tailwinds in March.”
Economists are boosting spending estimates as retailers from Darden Restaurants Inc. (DRI) (DRI) to Ross Stores Inc. (ROST) (ROST) say industry sales are picking up. Employment gains, the drop in energy costs, rising stock prices and reduced debt mean households have the wherewithal to overcome a payroll-tax increase that took an additional 2 percent out of take-home pay this year.
“You’re seeing an improving trajectory in the labor market, which means stronger aggregate wages and salaries, and that’s going to be good for consumer spending,” Dutta said.
Stocks fell today, after the Standard & Poor’s 500 Index rose to within a point of its record high, amid concern Cyprus’s bank-restructuring plan will pave the way for losses on deposits in other European nations. The S&P 500 dropped 0.3 percent to 1,551.69 at the close in New York.
Spending projections climbed after a Commerce Department report this month showed retail sales jumped 1.1 percent in February, the biggest gain in five months. Eight of 13 major categories showed an increase in receipts, including auto dealers, building-material stores and Internet merchants.
The median estimate among the 30 forecasters who submitted consumer-spending projections after the retail sales data called for a 1.8 percent increase this quarter, according to a Bloomberg survey taken from March 8 to March 13, compared with a median of 1.4 percent for all those polled in February.
Retail sales rose in February even as gasoline prices climbed and tax refunds were delayed. A reversal of those challenges this month has brightened the outlook.
Last month saw the highest average gasoline price for any February since AAA, the largest U.S. automobile group, began tracking data in 2004.
A drop this month will have added significance because the fuel’s cost usually rises in March, making the current decline even bigger when the figures are adjusted for seasonal variations. The average price of regular gasoline at the pump fell 2.8 percent through March 24, compared with a 5.2 percent gain for the month on average over the past five years. Since 2005, the cost has not declined in March.
Assuming other costs keep rising at a similar pace as they have been and taking into account accelerating food expenses, the drop in gasoline will be enough to cause the consumer-price index to decrease “slightly” in March and April, according to a March 15 analysis by JPMorgan Chase & Co. economist Daniel Silver in New York. The CPI jumped 0.7 percent in February, the first gain in four months, paced by the biggest increase in gasoline prices in more than three years, Labor Department figures show.
What’s more, the current level of gas prices won’t hamper demand for other goods and services as much as in the past because households are buying more fuel-efficient vehicles, driving fewer miles and opting to carpool more often, said Omair Sharif, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut.
“If you look at the last three or four or five years, consumers have adjusted to these elevated gas prices,” Sharif said. “We’re at the point where higher gas prices are less of a concern than they used to be.”
American households are also taking an increase in the payroll tax in stride. On Jan. 1, Congress agreed to a fiscal pact that gave a permanent tax break to 99 percent of Americans while allowing the levy used to finance Social Security return to 6.2 percent from 4.2 percent. A worker earning $50,000 a year is taking home about $83 less a month because of the higher tax.
Executives at Darden, whose restaurant brands include Olive Garden and Red Lobster, see their industry gaining steam this month.
“The turn in March has been significant,” Clarence Otis, chief executive officer of the Orlando, Florida-based company said during a March 22 earnings call with analysts. “Consumers just were prepared, despite all the conversation, for the payroll-tax increase, and there was a pretty rapid spike up in gasoline prices. March indicates that consumers have adjusted.”
The payroll-tax increase is the one headwind that is not temporary, leading some economists to project spending will eventually slow.
Households have so far been able to sustain purchases by cutting back on the amount of money they put away each month, which will probably not go on indefinitely, said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado. The saving rate plunged to 2.4 percent in January, the lowest since November 2007, from 6.4 percent in December, according to figures from the Commerce Department.
Additionally, the tax increase also represents a bigger hit to lower-income workers, “all the more reason we should have seen a big spending hit,” said Englund. Purchases will grow at “a slow grind” in the second and third quarters as Americans deal with the repercussions of smaller take-home pay, he said.
Nonetheless, another assault on buying power is now dissipating. Political wrangling over the set of budget cuts and tax increases known as the fiscal cliff that were to take effect in Jan. 1 forced the IRS to delay accepting and processing 2012 tax returns, thereby slowing refunds.
The pace is now catching up to last year. Through March 21, taxpayers had received $191.8 billion in refunds this fiscal year, $15.1 billion less than at the same point last year, according to Treasury Department data. The gap has narrowed since the end of February, when there was a $23.8 billion shortfall that also reflected an additional day because of the leap year.
“Refunds were basically non-existent in January, they improved a bit in February, and what we’re seeing in March is that things are starting to pick up at a pretty good pace,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc.
Combined with an earlier Easter holiday than last year, the refunds are “going to be very supportive of March consumer spending,” said LaVorgna.
Ross Stores is beginning to notice the difference, according to Chief Operating Officer Michael O’Sullivan.
“We saw some slowness in the business, really at the beginning of the month,” O’Sullivan said during a March 21 earnings call. “We believe that that slowness was driven by the delay in tax refunds. Things started to pick up as the month progressed.”
LaVorgna now projects consumer spending will rise at a 2.5 percent annualized pace this quarter, the highest estimate in the Bloomberg survey. In the prior survey, the New York-based economist had forecast a below-consensus 1 percent pace.
Finally, consumer finances are in better shape. Mortgage and consumer-loan payments in the fourth quarter amounted to the smallest share of after-tax income since the Fed starting keeping records in 1980.
The reduction in debt, combined with a pickup in housing that will spur demand for appliances and pent-up demand to replace outdated automobiles, will sustain spending in 2013, according to Dutta at Renaissance Macro Research.
“How old is someone’s refrigerator, stove, or microwave or car?” said Dutta. “These things are older today than they’ve been any time in almost a generation. That’s likely what people are going to be buying in the second half of the year.”
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