Will the Payroll Tax Increase Affect Retail Sales?

The ICSC-Goldman Retail Chain Stores Index fell 1 percent week-over-week for the seven-day period ended January 26, the fourth consecutive period of declines. Year over year, store sales grew 2 percent, 1.2 points shy of the 3.2 percent growth rate trend that was established heading into the reading. Similarly, the Redbook report shows year-over-year retail growth of just 1.6 percent for the week ended January 26, compared to 1.8 percent average growth for December.

Consumer spending accounts for as much as 70 percent of economic activity, and patterns of consumer behavior are like economic trade winds that investors can use to plot a course through the markets. Strong consumer spending generally translates into strong economic growth, but this week’s underwhelming reading indicates that a recovery is still brewing. Consumers could be fatigued from holiday shopping and adding to savings instead of spending. Financial belts are still tight and average wages aren’t growing very quickly, further catalyzing saving behavior.

Michael Niemira, ICSC chief economist, offers one contributing factor, commenting that “temperatures were sharply colder this past week than last year, which may have helped the clearance of seasonal apparel, but it also seemingly held back the consumers spending in most segments.” However, more likely to blame is the expiration of the two-year payroll tax holiday…