The 3rdestimate of 4Q12 GDP growth showed a downward revision to consumer spending growth. Less momentum heading into 1Q13, right? Guess again. Revisions to the monthly data actually showed better growth heading into the new year. Moreover, figures for January and February suggest a much stronger rate of growth in spending (and hence GDP) than was anticipated just a short time ago.
While the estimate of consumer spending growth for 4Q12 was revised down (to a 1.8% annual rate, vs. +2.1% in the previous estimate), the monthly figures had a steeper tilt (October revised lower, December revised higher). Spending figures for February rose more than expected, while January was revised higher. The result? Inflation-adjusted consumer spending (70% of GDP) is on track for a 3.0% to 3.5% annual rate, far better than the 1.5% to 2.0% pace seen previously.
What happened to the impact of the payroll tax increase? A recent Bankrate survey showed that nearly half of the respondents noticed no impact from the payroll tax rise. Spending reductions were reported by 30%, while 11% indicated cutting back on savings or retirement contributions. The math on the payroll tax is simple. Someone making $60,000 per year saw his or her take-home pay drop by $100 per month. However, many workers have direct deposit and may not “see” a paycheck. Two years ago, the cut in payroll taxes had a positive impact on spending, but the cut wasn’t well advertised. Most households were unaware that the tax had been lowered. Similarly, many are unaware that the rate went up this year. If that’s the case, the impact of the payroll tax increase may show up with a lag. However, there could be other factors.
Real average wage income, the traditional fuel for consumer spending growth, has been trending flat. That means aggregate spending growth is being driven by job gains, wealth effects, or reduced savings. Job growth has been strong, but the key question is whether the pace will keep up or begin to fade (as it has often done). The wealth effect on consumer spending is relatively small, but a large enough increase in wealth (in housing and the stock market) will have a noticeable impact. The savings rate was reported lower in January and February. However, the savings rate is a notoriously flawed statistic. The government does not measure savings directly – it’s calculated as a residual (income less taxes and outlays). A number of years ago, the press had many stories about “the negative savings rate.” Figures were eventually revised to show a positive rate.
Of the various explanations for the stronger-than-expected first quarter pace in consumer spending, robust job growth is the most compelling. As Chairman Bernanke and others have noted, we need to be sure that the recent strength in job growth won’t prove to be temporary (as we saw in the early part of the last two years). Friday’s payroll data will provide important clues, but they won’t remove near-term uncertainties.
© Raymond James
