With employment improving and lower gas prices, consumer spending ended 2012 with a little momentum, as the Commerce Department reports the closely watched retails sales indicator rose 0.5 percent from the prior month. The November sales figure was revised up to 0.4 percent after an initial report of 0.3 percent increase. Sales advance 4.7 percent on a year-to-year basis.
Vehicles and auto parts sales increase 1.6% to lead all categories. The final sales figures for 2012 make it the best year for the automobile industry since 2007. Subtracting the 1.6% drop in sales for gasoline stations, retail sales shows even more strength—increasing 0.8%.
The December retail sales report shows that beside strong car sales, households brought 1.4% more in furnishings. People also increased spending in the health and personal care categories by 1.4%. Sales at specialty store rose by 1%.
Nonretail sales—Internet stores and mail order businesses, which includes gained 12.6 percent over last year. The sales of miscellaneous store retailers increased 9.9 percent compared to December 2011.
General merchandise and department stores, retailers like Macy’s, Target, and Wal-Mart, experienced flat sales after a 0.8% decrease in November.
Fiscal Cliff Not a Big Factor
Many economists expressed concern that the failure of Congressional leaders and the White House to iron out an agreement to resolve the budget issues before the end of the year would cause consumers to tighten the purse strings. Instead, households purchased more apparel, furniture, and automobiles than expected.
On January 1, Senate and House leaders passed the American Taxpayer Relief Act of 2012, which averted massive government spending cuts and prevented tax increases for most American households. The 157 pages of new tax code raised taxes for the wealthiest taxpayers.
Economists participating in the Reuters survey anticipated just a 0.2 percent increase for the month.
Rollback of Payroll Tax Reduction
The accord reached by President Obama and lawmakers allows the two-year reduction in Social Security payroll taxes to expire. Although technically it’s not a tax increase, eliminating the reduction has the same effect as a tax hike–most consumers receive a smaller paycheck starting this month. The 4.2% rate for 2011 and 2012 climbed back up to 6.2%.
An individual earning $50,000 will see about a $1,000 decrease. The two-year reduction, which was originally enacted to help lower and middle-income taxpayers to deal with the recession, put a total of about $240 billion into the pockets of consumers.
Since consumer spending makes up around 70% of domestic expenditures, many economists expect consumer spending to contract, this affecting economic growth. BTIG chief global strategist Dan Greenhouse says, “Nothing in today’s data does anything to dispel the notion that consumer spending the first half of 2013 should be quite weak.”
For the entire 2012 year, retail sales rose 5.2 percent, which constitutes the lowest percentage growth since the end of the recession in 2009. In 2010, retail sales grew at a 5.6% rate. In 2011 the growth rate was 7.9%.