The Daily Item, Sunbury, PA

January 11, 2013

Consumer Comfort Drops as Americans Brace for Payroll Tax Boost

By Alex Kowalski
Bloomberg News

Washington, D.C. — Consumer confidence slumped last week to the lowest level in a month as Americans prepared to lose a portion of their pay to taxes.

The Bloomberg Consumer Comfort Index fell to minus 34.4 in the seven days ended Jan. 6 from minus 31.8 the prior period, the biggest one-week drop since August. All three components of the measure declined.

Paychecks will shrink after Congress agreed last week to let the payroll tax that funds Social Security benefits revert to 6.2 percent from 4.2 percent. With spending power diminished, Americans will have to rely on increases in salaries to counter some of the lost income just as the economy is struggling to strengthen.

"Policy tensions surrounding the budget standoff in Washington and the reset of the payroll tax were the likely catalysts for a decline in consumer comfort," said Joseph Brusuelas, senior economist at Bloomberg LP in New York. "Most households were probably blissfully unaware that their after-tax income would fall as a result of the partial solution to the fiscal cliff."

More Americans than forecast filed applications for unemployment benefits last week, a sign improvement in the labor market remains uneven, another report Thursday showed.

Jobless claims increased by 4,000 to 371,000 in the week ended Jan. 5, according to data form the Labor Department. The median forecast of 48 economists surveyed by Bloomberg called for a drop to 365,000.

The decline in comfort last week was broad-based. The personal finances gauge fell to minus 2.6 from 0.8 the prior week, the first positive reading since July. The barometer measuring Americans' views on the state of the economy decreased to minus 58.7 from minus 57.1. The buying climate index dropped to minus 41.9, falling for a third consecutive week to reach the weakest level in more than three months.

The overall comfort index was still better than the 2012 average of minus 38.1. Last week's decrease was within the margin of error of 3 percentage points.

Other sentiment measures showed Americans' moods had soured before they knew lawmakers would allow taxes to rise. The Thomson Reuters/University of Michigan confidence index dropped to a five-month low in December. The decrease was the biggest in more than a year. The Conference Board's index fell last month by the most since early 2011.

To help manage the federal budget, lawmakers agreed on Jan. 1 to let a payroll-tax cut expire, which means an individual taking home $50,000 annually will lose a little more than $80 a month. The levy will probably have a larger impact on lower- income Americans.

"Near term, the environment remains difficult," Howard Levine, chief executive officer of Family Dollar Stores Inc., said during a Jan. 3 earnings call. "Recent consumer confidence commentary and muted holiday-sales results confirm to us that our customers remain cautious. I view things like payroll taxes, increased gas prices as things that go against our customer's wallet. Clearly, they do not have as much for discretionary purchases as they did."

Shares of the Matthews, N.C.-based dollar store chain, the second largest in the United States, tumbled 13 percent Jan. 3, the biggest drop in more than 12 years, after it posted weaker profit margins and cut its full-year profit outlook.

The Bloomberg index indicated those with less disposable income showed the biggest declines in confidence last week. Americans making between $25,000 and $39,999 were the most pessimistic in three months, and confidence among those earning $15,000 to $24,999 a year fell by the most in two months.

Consumers on the other end of the income scale remained more confident. Thursday's figures showed comfort among those earning $50,000 or more annually climbed to the highest level since November 2007. Sentiment among those making $100,000 or more was the highest since October 2010.

The fight over the federal budget also affected sentiment along partisan lines. The confidence gap between Republicans and the more optimistic Democrats was the widest in records going back to 1990.

"Given the budget battle ahead over the federal-debt limit and spending cuts, it seems likely that partisan-related divisions will carry on into the new year," said Gary Langer, president of Langer Research Associates in New York, which compiles the index for Bloomberg.

The Consumer Comfort Index is based on telephone surveys from a random sample of 1,000 consumers 18 years old and older. Each week, 250 respondents are asked for their views on the economy, personal finances and buying climate. The percentage of negative responses is subtracted from the share of positive views and divided by three. The most recent reading is based on the average of responses over the previous four weeks.

The comfort index can range from 100 — indicating every participant in the survey had a positive response to all three components — to minus 100, signaling all views were negative.