Recent reports forecast lower spending for this year, anticipating that the restored payroll tax will impact consumers’ wallets, especially low-income earners. Wal-Mart is adjusting its strategy.
Retailers are preparing for a triple whammy as the restoration of the payroll tax, surging gas prices, and stagnant employment and wages take a bite out of consumers’ disposable income, leaving them with less cash to spend on clothing, groceries, and eating out.
As a result, more than three years after the recession officially ended, American consumers might be preparing to downshift again, if only slightly, with low-income consumers hit the hardest. Sensing consumer trepidation, retailers are scrambling to adjust.
Retailers, restaurants, and consumer goods companies like Wal-Mart are lowering sales forecasts and adjusting marketing campaigns ahead of expectations that consumers will slash spending, the Wall Street Journal reports.
In a survey released Thursday, the National Retail Federation (NRF) said some 46 percent of consumers plan to spend less as a result of the payroll tax increase. One-third said they will reduce dining out and one-quarter will spend less on “little luxuries,” like manicures and trips to coffee shops.
“A smaller paycheck due to the fiscal cliff deal early last month, higher gas prices, low consumer confidence and ongoing uncertainty about our nation’s fiscal health is negatively impacting consumers and businesses across the country,” Matthew Shay, president and CEO of the NRF, said in a statement.
Originally enacted in December 2010 to help taxpayers weather the recession and to spur economic activity, the payroll tax cut expired Jan. 1 of this year. The restoration of the tax effectively raised the rate from 4.2 percent in 2012 to 6.2 percent in 2013, shaving 2 percent from consumers’ take-home pay.
That means Americans making $50,000 a year will pay $83 more in taxes each month, almost $1,000 more each year. Those making $75,000 will pay $125 more each month, or $1,500 more each year. As retailers see it, that’s $1,500 less a consumer has to spend on groceries, household goods, and dining out.
Multiply that by 153.6 million people in the labor force and retailers start to panic. According to an estimate by Citigroup, the expiration of the payroll tax cut will move $110 billion out of consumers’ pockets.