Payroll tax hike narrows January gains in consumer confidence
ANN ARBOR—Consumer confidence began to improve in January following the uncertainty generated by the fiscal crisis, according to University of Michigan economist Richard Curtin, director of the Thomson Reuters/University of Michigan Surveys of Consumers.
The surveys, conducted by the U-M Institute for Social Research, have been monitoring consumer attitudes and expectations for more than 60 years.
So far, the rise in consumer confidence has been extremely small, as consumers were still much less optimistic in January than several months ago, Curtin reports. Importantly, the payroll tax increase has had a significant impact on lower income households, as nearly the entire January gain was due to households with incomes above $75,000.
Concerns about disposable incomes have dominated consumer confidence for more than four years, he says. The key to rising consumer spending is whether gains in employment are able to offset higher payroll taxes. Overall, consumer total expenditures adjusted for inflation will grow by 1.8 percent in 2013, just below the 1.9 percent in 2012.
“The end of the payroll tax holiday had a significant impact on consumer confidence, especially among lower income households,” said Curtin. “When asked to describe recent changes in their financial situation, declines in disposable incomes were much more frequent among households with incomes below $75,000. Indeed, higher income households much more frequently mentioned income gains in January than in the December survey. While consumer spending will slow in 2013, spending by higher income households, especially on interest sensitive purchases of homes, vehicles and household durables, will keep consumer spending slowly expanding in 2013.”
Personal Finances Diverge Between Income Groups
The personal finances of consumers have weakened considerably compared with the closing months of 2012. The January decline was due to households with incomes below $75,000 reporting more frequent losses than could be offset by upper income households. Indeed, just 13 percent of lower income households reported gains in disposable income in January (down from 21 percent in December), compared with 38 percent of upper income households (up from 25 percent in December). Overall, income gains expected in 2013 are smaller than the expected inflation rate.
Economic Slowdown and Small Gains in Unemployment Anticipated
More consumers anticipate that economic conditions will improve rather than worsen in 2013. While consumers are less fearful of a renewed downturn during the year ahead, nearly six in 10 expect a downturn sometime in the next five years in the January survey. On the employment front, consumers do not anticipate a significant decline in the overall unemployment rate during 2013, although they still anticipate a slowly falling rate.
Consumer Sentiment Index
The Sentiment Index was 73.8 in the January 2013 survey, up from 72.9 in December, but below last January’s reading of 75.0. The two components of the index moved in opposite directions. The Expectations Index posted a gain to 66.6 in January from 63.8 in December, while the Current Economic Conditions Index declined to 85.0 in January from 87.0 in December.
About the survey
The Surveys of Consumers is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95-percent level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6.0 points. For more information, visit the Surveys of Consumers website at http://press.sca.isr.umich.edu.
Established in 1949, the University of Michigan Institute for Social Research (ISR) is the world’s largest academic social science survey and research organization, and a world leader in developing and applying social science methodology, and in educating researchers and students from around the world. ISR conducts some of the most widely-cited studies in the nation, including the Thomson Reuters/University of Michigan Surveys of Consumers, the American National Election Studies, the Monitoring the Future Study, the Panel Study of Income Dynamics, the Health and Retirement Study, the Columbia County Longitudinal Study and the National Survey of Black Americans. ISR researchers also collaborate with social scientists in more than 60 nations on the World Values Surveys and other projects, and the Institute has established formal ties with universities in Poland, China, and South Africa. ISR is also home to the Inter-University Consortium for Political and Social Research (ICPSR), the world’s largest digital social science data archive. Visit the ISR Web site at http://www.isr.umich.edu for more information.