Consumer confidence waned last week and firings unexpectedly climbed, the first sign that higher U.S. payroll taxes will slow the economic expansion at the start of this year.
The Bloomberg Consumer Comfort Index fell to minus 34.4 in the seven days ended Jan. 6 from minus 31.8 the prior period, the biggest one-week drop since August. Jobless claims increased by 4,000 to 371,000 in the week ended Jan. 5, according to Labor Department figures.
Paychecks are shrinking after Congress last week let the tax that funds Social Security benefits revert to 6.2 percent from 4.2 percent. That means Americans will have to rely on increases in salaries to counter some of the lost income at the same time the job market shows little sign of further progress and the debate in Washington turns to federal spending cuts and the debt.
“Consumers are coming to the realization that their take- home pay is going to get smaller,” said Richard Yamarone, a senior economist at Bloomberg LP in New York. “That will translate into weaker spending. I expect the economy will spin its wheels for many months until the jobs picture, and associated incomes, improves.”
Shares climbed as optimism about China’s economy tempered a decline in technology stocks. The Standard & Poor’s 500 Index rose 0.3 percent to 1,465.98 at 12:58 p.m. in New York.
The decline in comfort last week was broad-based as all three components retreated. The personal finances gauge fell to minus 2.6 from 0.8 the prior week, the first positive reading since July. The barometer measuring Americans’ views on the state of the economy decreased to minus 58.7 from minus 57.1. The buying climate index dropped to minus 41.9, falling for a third consecutive week to reach the weakest level in more than three months.
To help rein in the federal budget deficit, lawmakers agreed on Jan. 1 to let a payroll-tax cut expire, which means an individual taking home $50,000 annually will lose a little more than $80 a month. The levy will probably have a larger impact on lower-income Americans.
“Near term, the environment remains difficult,” Howard Levine, chief executive officer of Family Dollar Stores Inc. (FDO:US), said during a Jan. 3 earnings call. “Recent consumer confidence commentary and muted holiday-sales results confirm to us that our customers remain cautious. I view things like payroll taxes, increased gas prices as things that go against our customer’s wallet. Clearly, they do not have as much for discretionary purchases as they did.”
Shares of the Matthews, North Carolina-based dollar store chain, the second-largest dollar store in the U.S., tumbled 13 percent Jan. 3, the biggest drop in more than 12 years, after it posted weaker profit margins and cut its full-year profit outlook.
The Bloomberg index indicated those with less disposable income showed the biggest declines in confidence last week. Americans making between $25,000 and $39,999 were the most pessimistic in three months, and confidence among those earning $15,000 to $24,999 a year fell by the most in two months.
Consumers on the other end of the income scale remained more confident. Today’s figures showed comfort among those earning $50,000 or more annually climbed to the highest level since November 2007. Sentiment among those making $100,000 or more was the highest since October 2010.
The number of Americans applying for unemployment insurance payments last week was the highest in a month and came as the median forecast of 48 economists surveyed by Bloomberg called for a drop to 365,000. Estimates ranged from 340,000 to 380,000.
A consistent decline in firings, along with a rise in payrolls, is needed to spur consumer spending, which accounts for about 70 percent of the economy. While the agreement reached by Congress averted sweeping tax increases and delayed budget cuts that threatened the expansion, the impending battle over the debt limit may weigh on the outlook for jobs.
“The story isn’t in firings so much as it is in hiring,” said Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York, who projected claims would increase. “We need to see better payrolls data to get faster economic growth.”
Employment climbed by 155,000 last month following a revised 161,000 advance in November that was more than initially estimated, Labor Department figures showed on Jan. 4. The unemployment rate held at 7.8 percent after the November figure was revised up from a previously reported 7.7 percent.
Another Labor Department report today showed job openings rose in November before congressional wrangling over a package of tax increases and government budget cuts had intensified.
The number of positions waiting to be filled climbed by 11,000 to 3.68 million, the most in five months, from 3.67 million in October. The report also showed hiring was little changed and firings eased.
Wholesalers were in a good position to respond to any pickup in demand, data from the Commerce Department also showed today. Stockpiles at distributors rose 0.6 percent in November, falling short of a 2.3 percent jump in sales, the biggest since March 2011, as auto demand rebounded after superstorm Sandy.
That meant wholesalers had enough goods on hand to satisfy 1.19 months of sales at the current pace, the fewest since May. Low inventories signal orders to manufacturers will pick up along with any increase in demand.
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