50% of consumers shrink spending

Oregon-tax-newsNearly 50% customer Spending slump from payroll tax, gas prices
By Oregon Tax News

The U.S. Commerce Department reported that January retail sales rose at the lowest rate in three months. That number is bolstered by a study from the National Retail Federation (NRF) indicating that 45.7 percent of consumers are cutting back on spending.

The effect is directly tied to the restoration of the 2% payroll tax that expired last year and rising gas prices. In January, the two percent payroll tax reprieve ended and taxpayers making $65,000 on average will take roughly $110 less home each month, $1300 less annually, and U.S. taxpayers of all incomes will lose $110 billion in spending power.

The impact of reduced income beginning in January has been coupled with rising gas prices beginning in February. Consumers are paying nearly 50 cents more per gallon now than in January, an upward trajectory expected to peak in the spring. The average price of a gallon of gas hit $3.78 nationwide in February. In California, drivers are paying as much as $4.20 per gallon. AAA Oregon reports that Oregon drivers are paying $3.64 on average at the pump—the highest rate since early November of last year.

Some economists are calling the higher payroll tax and rising gas prices the “one-two punch” that could slow any economic recovery underway. Though overall gas prices are only slightly higher than a year ago, consumers’ paychecks are now two percent smaller. Recent reports lend credence to concerns that reduced income and higher gas prices are affecting consumers’ spending habits.

Though some companies have been ahead of the curve in anticipating recent trends in consumer spending, companies like Wal-Mart, Burger King, among others are feeling the effect and have recently lowered their forecasts for the year. Analysts say that these companies are a good indicator of the impact of pressures faced by consumers, since their customers are more likely to change spending behaviors rather than resort to credit card use.

To lure consumers back, some retailers are altering their marketing strategies. Wal-Mart, for instance is offering cheaper product alternatives and repacking popular products in smaller, less expensive quantities. Fast food chains are revamping their value menus to offer more reduced-price items. The cost of many products could rise, however, as companies deal with higher energy prices and an increased cost of doing business. Ultimately, consumer demand, or lack thereof, may drive the cost of products down, but this, in turn, could depress job growth as companies operate on smaller margins.

The extent to which recent consumer trends take hold remains to be seen. Some analysts are optimistic that the long-term economic effect of higher payroll taxes will be marginal, particularly once gas prices begin to descend shortly after Memorial Day. For now, consumers appear to be feeling the squeeze of less income and higher gas prices.

Disclaimer: Articles featured on Oregon Report are the creation, responsibility and opinion of the authoring individual or organization which is featured at the top of every article.