March retail-sales figures were worse than the already muted expectations of economists. And retailers, like Target, which warned last week of soft sales, are feeling the pinch.
This might have something to do with the weather, since last month was wintrier than usual. But the decline in a variety of consumer-confidence gauges suggests there is more than just a chill in the air at work. The favorite theory is that January's payroll-tax increase has begun to weigh on consumers just as sequester-related government-spending cutbacks are putting a further drag on paychecks.
But while spring swoons in consumer spending have in recent years become a regular occurrence, any downtick this time around will likely be brief. While government-related moves are sapping consumers' strength, two other forces, lower energy costs and rising asset prices, are bucking them up.
Earlier this month, the U.S. Energy Information Administration predicted that regular gasoline would fetch $3.63 a gallon during the April-through-September summer driving season, versus last year's average of $3.69. Now, it looks as if the decline will be much steeper: On Monday, regular averaged $3.54, according to the EIA's weekly survey of gasoline stations, down 33 cents from $3.87 a year ago. And with the most recent downdraft in crude-oil prices, gasoline may go lower still.
Since Americans use roughly 135 billion gallons of gasoline a year, the 33-cent decline would, if it persisted, save them about $45 billion a year. That comes to about 40% of the estimated $115 billion that will come out of paychecks this year due to the reversal of the 2011 payroll-tax cut.
Wealth effects also are providing a boost. Economists calculate that over the past two decades, every 10% increase in housing wealth led to a 0.33% increase in consumer spending, while every 10% increase in stock-market wealth led to a 0.11% increase in spending.
Economists polled by The Wall Street Journal estimate home prices will rise 5.3% this year, which would translate into a spending increase of about $20 billion. The stock market is up about 9% so far this year, which would translate to a further spending increase of about $10 billion.
Wealth effects are probably smaller these days than they once were, partly because, after the financial crisis, people are less certain gains will persist. But even if the effects are less, they may be enough offset the sequester.
offset the sequester, which the model run by economic forecasting firm Macroeconomic Advisers indicates will peel about $14 billion off consumer spending this year.
Of course, models of economic activity are imperfect. Maybe consumers will cut spending by the full amount of the payroll-tax increase. And maybe consumers will hang on to more of their cash.
Then again, lower energy and commodity prices might put manufacturers in more of a hiring mood. And with rising home values improving their balance sheets, banks might be more willing to extend credit to consumers.
Consumer spending might hold up just fine
