Households have so far been able to sustain purchases by cutting back on the amount of money they put away each month, which will probably not go on indefinitely, said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado. The saving rate plunged to 2.4% in January, the lowest since November 2007, from 6.4% in December, according to figures from the Commerce Department.
Additionally, the tax increase also represents a bigger hit to lower-income workers, “all the more reason we should have seen a big spending hit,” said Englund. Purchases will grow at “a slow grind” in the second and third quarters as Americans deal with the repercussions of smaller take-home pay, he said.
Nonetheless, another assault on buying power is now dissipating. Political wrangling over the set of budget cuts and tax increases known as the fiscal cliff that were to take effect in Jan. 1 forced the IRS to delay accepting and processing 2012 tax returns, thereby slowing refunds.
The pace is now catching up to last year. Through March 21, taxpayers had received $191.8 billion in refunds this fiscal year, $15.1 billion less than at the same point last year, according to Treasury Department data. The gap has narrowed since the end of February, when there was a $23.8 billion shortfall that also reflected an additional day because of the leap year.
“Refunds were basically non-existent in January, they improved a bit in February, and what we’re seeing in March is that things are starting to pick up at a pretty good pace,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc.
Combined with an earlier Easter holiday than last year, the refunds are “going to be very supportive of March consumer spending,” said LaVorgna.
Ross Stores is beginning to notice the difference, according to Chief Operating Officer Michael O’Sullivan.
“We saw some slowness in the business, really at the beginning of the month,” O’Sullivan said during a March 21 earnings call. “We believe that that slowness was driven by the delay in tax refunds. Things started to pick up as the month progressed.”
LaVorgna now projects consumer spending will rise at a 2.5% annualized pace this quarter, the highest estimate in the Bloomberg survey. In the prior survey, the New York-based economist had forecast a below-consensus 1% pace.
Finally, consumer finances are in better shape. Mortgage and consumer-loan payments in the fourth quarter amounted to the smallest share of after-tax income since the Fed starting keeping records in 1980.
The reduction in debt, combined with a pickup in housing that will spur demand for appliances and pent-up demand to replace outdated automobiles, will sustain spending in 2013, according to Dutta at Renaissance Macro Research.
“How old is someone’s refrigerator, stove, or microwave or car?” said Dutta. “These things are older today than they’ve been any time in almost a generation. That’s likely what people are going to be buying in the second half of the year.”