Wages a Balm for U.S. Workers Facing Payroll-Tax Shock

An improving job market is boosting wages and providing needed relief just as every American worker gets hit with a tax increase.

Hourly earnings climbed 0.3 percent on average in December for a second month, the biggest back-to-back increase since the economic recovery began in mid-2009, Labor Department figures showed Jan. 4. Combined with a lengthening of the workweek, that brought the average weekly paycheck to $818.69, up 1.2 percent from October and the steepest two-month gain since February-March 2007, before the recession began.

The boost comes just as the fiscal pact passed by Congress last week lets the payroll tax used to pay for Social Security benefits rise to 2010 levels, reducing paychecks by $41.67 from someone earning $50,000 who is paid twice a month. The higher salaries, together with the lowest gasoline prices in almost a year, will provide a lift to household spending, which accounts for about 70 percent of the world’s largest economy.

“Let’s not be too quick to write off the American consumer,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Paychecks are a little healthier. The outlook for the consumer is probably a bit brighter than people think.”

Arnaud Collin is among those recognizing a more attractive salary will help draw the workers he needs. The chief marketing officer at Los Altos, California-based Catalog Spree, developer of a mobile shopping application, says “there’s just more competition” in the Silicon Valley region for people with skills in commerce and mobile marketing. “I usually end up paying at the high end of the range.”

Being Pursued

Collin, 36, has first-hand knowledge of the situation. He said he is being pursued by head hunters after only eight months into his own new job. Two of Catalog Spree’s 19 full-time employees came on board at the end of 2012, he said.

“I think I lost a candidate because I wasn’t paying enough,” said the former eBay Inc. marketing executive. “She got an offer much higher than what I was ready to pay.”

The Standard & Poor’s 500 Index jumped 4.6 percent last week to reach the highest level since December 2007 after the employment report showed the world’s largest economy kept expanding even as the budget fight intensified. The S&P 500 fell 0.3 percent to 1,461.89 at the close in New York today as investors awaited tomorrow’s start of the corporate earnings season.

Job and income gains may be one reason consumer confidence and spending held up the past few months as lawmakers struggled to avert $600 billion in sweeping tax increases and government spending cuts that were slated to take effect this year.

Growing Confidence

The Bloomberg Consumer Comfort Index rose to an eight-month high in the week ended Dec. 30. For the year, the index climbed 12.9 points, the biggest annual improvement since 1998. Americans earning $100,000 or more reported their most optimistic reading in more than two years.

Growing optimism may be one reason demand is holding up. Cars and light trucks sold at a 15.3 million annual rate in December to complete the best annual total since 2007, industry figures showed last week. Virtually all major automakers added shifts and jobs throughout 2012 to keep up.

“Workers are enjoying better income growth, which should further their ability to continue spending,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit. “The economy is really poised to accelerate as long as Washington is able to resolve the remaining issues” related to the debt limit and government spending cuts.

Fiscal Deal

The bipartisan agreement passed by Congress on Jan. 1 makes permanent the George W. Bush-era income tax cuts for 99 percent of Americans while letting them end for top earners. The payroll tax cut, which was designed as a temporary measure to boost the economy in 2011 and extended through 2012, also expired. The levy reverts to 6.2 percent from 4.2 percent last year.

Left unsettled was an agreement on public spending as the Treasury bumps up against its legal borrowing limit. Senate Minority Leader Mitch McConnell said yesterday further tax changes are off the table as lawmakers and President Barack Obama gear up for a fight next month over raising the limit. Republicans want deficit reduction through government spending cuts, while Democrats counter that everything including taxes has to be part of the negotiations.

At such a time, the improvement in income and job growth provides some offset, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

Income Cushion

“Consumption will be soft in the first quarter, but consumers will not shut down totally,” LaVorgna said. “We’re seeing decent income gains. That will help cushion some of the hit.”

Household purchases will grow at a 1.7 percent annual rate in the first three months of year, and then pick up over the next six months, according to the median forecast of economists surveyed by Bloomberg last month. By comparison, it rose at an average 2.9 percent pace in the five years before the last recession began.

Federal Reserve Bank of St. Louis President James Bullard is among those predicting the impact of higher payroll tax will not be huge.

“The payroll tax was unlikely to continue at the discounted rate, so I don’t think it should be as big of a surprise as maybe it has been made out to be in the last couple days,” Bullard told reporters during a conference on Jan. 4. Workers “are very cognizant of what their paycheck is going to be,” he said. “People knew this was not going to last forever. I think they have got contingency plans in place.”

Lengthening Workweek

An increase in hours is another encouraging aspect of last week’s jobs report, LaVorgna said. The average workweek climbed by six minutes in each of the past two months to reach 34 hours and 30 minutes in December, according to the Labor Department’s data. Every six-minute gain is the equivalent of about a 300,000 advance in payrolls, he said. In addition, lower energy costs, higher home prices and increasing wealth amount to a “higher cash flow” for households, and “that should lift private demand,” he said.

The rebound in housing is bearing fruit for furniture makers, some of whom are adding workers to keep up with demand.

“We have a sense of much more positive momentum heading into next year than we did at this time last year,” Alan Cole, president of Martinsville, Virginia-based Hooker Furniture Corp., said on a Dec. 5 conference call with analysts. “We’ve had to significantly ramp up production in response to this brisk demand.”

Orders for Hooker’s Sam Moore brand line of upholstered sofas were up about 25 percent in the period ended Oct. 28 from the same time in 2011, while backlogs were more than 50 percent higher, he said. As a result, “we’ve expanded our workforce by about 5 percent to date and anticipate another 5 percent expansion in the coming months,” Cole said.

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