Will Retail Sales Bring the Economy to a Screeching Halt?

retail shopping tiredRetail sales figures have faced comparison to strong numbers from last year, and they have not stood up well. Early in the year, the consumer spending growth thesis put forward by many analysts, pundits, and even several retailers themselves postulated that the end of the payroll tax holiday would cause the majority of Americans to tighten their financial belts and cut way back on discretionary spending. This reality now seems to be materializing.

In March, retail sales were held back by the scant progress made in the labor market over the same period. Combined with little growth in wages, Americans found it difficult to spend, which is concern for economists as consumer spending accounts for approximately 70 percent of the economy. U.S. retail sales contracted last month for the second time in three months while consumer confidence began to plummet in the first week of April — a sign that the end of the payroll tax holiday, put in place in January, has stolen momentum from the American economy.

Analysts had expected a flat reading of this key economic indicator, but the Commerce Department announced Friday that retail sales fell 0.4 percent in March. This data supports the view that the U.S. economy continues to flounder and has not performed as well as analysts had thought it would, reported Reuters. As a result, many analysts lowered their gross domestic product growth forecasts for the first quarter, including Barclays — which decreased its estimate for first quarter growth from a 3.2 percent annual rate to a 2.8 percent rate. Contributing to that lowered outlook was another Commerce Department report, which showed that U.S. business inventories rose less than expected in February.

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“The payroll tax increase is hurting,” Pantheon Macroeconomic Advisors economist Ian Shepherdson told the publication…

While this thesis is gaining momentum, readings for retail sales have been volatile this year, making it difficult for analysts to know whether the low reading for March was due to the payroll tax increase or to temporary factors related to the weather. But there were signs in the Commerce Department’s report that indicated the higher taxes have significantly affected Americans’ budgets; excluding cars, gasoline, and building materials, retail sales dropped 0.2 percent in March. As Reuters noted, this core measure corresponds closely with the consumer spending component of gross domestic product.

Previous retail sales reports appeared to indicate that consumers were “surprisingly resilient,” according to Reuters, despite the tax increases. However, fiscal policy contracted further when the federal government began to implement across-the-board spending cuts known as the “sequester.” These austerity efforts could subtract approximately 1.5 percentage points from economic growth this year, according to an estimate by the non-partisan Congressional Budget Office

The government also revised retail sales figures to lower levels for the first two months of the year, decreasing February’s reading to a 0.3 percent gain and January’s reading to flat.

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It was not just retail sales that took a hit. The preliminary reading on the overall index of consumer sentiment compiled by Thomson Reuters and the University of Michigan dropped to 72.3 in April, the lowest reported level since July 2012.

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