Covering The Economy

Feb 13, 2013 9:02 AM

US Retail Sales Rise 0.1 Pct. After Tax Increase

WASHINGTON (AP) - Americans barely spent more last month at retail businesses and restaurants after higher taxes cut their paychecks. The small increase suggests consumer spending may be weak in the January-March quarter, which could hold back economic growth.

Retail sales ticked up 0.1 percent in January from December, the Commerce Department said Wednesday. That follows a 0.5 percent increase in December and is the smallest in three months.

Sales fell at auto dealerships, clothing stores and furniture stores. They rose at home-improvement stores, gas stations and online retailers.

So-called core retail sales, which exclude autos, building materials, and gas stations, ticked up 0.2 percent. Economists pay close attention to core sales because they strip out the most volatile categories.

The retail sales report is the government's first look at consumer spending, which drives 70 percent of economic activity.

Growth is likely to stay weak in part because nearly all working Americans are taking home less pay this year. Congress and the White House allowed a temporary 2 percentage point cut in Social Security pension taxes to expire last month. That means a person earning $50,000 a year will have about $1,000 less to spend in 2013. A household with two high-paid workers will have up to $4,500 less.

Top-earning households are also paying higher income taxes this year. While the Obama administration and Congress agreed to prevent income taxes from rising on most Americans, their deal allowed income taxes to rise on individuals earning $400,000 a year and couples earning $450,000 a year.

The Social Security tax increase was a key reason the Conference Board's index of consumer confidence plummeted last month to its lowest level in 14 months. That survey was taken early in the month, when most Americans were discovering their smaller paychecks.

But a separate survey taken later in the month by the University of Michigan suggested consumers weren't quite as dismayed, possibly after absorbing the impact of the tax increase.

Americans may be feeling better about the economy because of improvement in the job market. Employers added an average of 200,000 jobs a month in the final three months of last year, the Labor Department said earlier this month. That was up from just 150,000 in the preceding three months.

And some retail store chains reported healthy sales gains last month, suggesting that at least some consumers kept shopping even after the tax cut kicked in. Some of the gains likely reflected healthy holiday discounts.

Overall, consumer spending grew at a faster pace in the final three months of last year than in the preceding quarter. Still, steep cuts in defense spending and slower company restocking weakened the economy in the fourth quarter.

(Copyright 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)

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