Retail sales growth slows as higher payroll tax resumes

The pace of shopping slowed at clothing stores and at some other retail stores last month.
(Spencer Platt / AFP/Getty Images)
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WASHINGTON — With the higher payroll tax starting to kick in, retail sales rose in January at their smallest rate in three months. Consumers pulled back a bit on their purchases of cars, clothes and home furnishings, the government said.

Overall, retail sales ticked up a modest 0.1% last month from December, after gains of 0.5% in each of the prior two months. The subdued January performance was in line with consensus forecasts, as many analysts were expecting a drop-off in the growth rate after the expiration of the payroll tax holiday, which translates to about $40 less in take-home pay for the average worker every two weeks.

The latest Commerce Department figures, which came out Wednesday, are consistent with other indicators showing a weakening of consumer confidence at the start of this year, even as Americans are becoming somewhat more comfortable using credit again, said Kathy Bostjancic, an economist at the Conference Board.


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Still, given the bigger bite in the payroll tax and higher income taxes for the wealthy, plus the recent jump in gas prices, some economists found it encouraging that there was any growth at all in retail sales last month. Analysts say the near-term outlook is for more modest gains in retail sales.

The pace of job and income growth has picked up some, and a continuing recovery in the housing market should help boost confidence and spending. But with likely additional cutbacks in federal government spending adding to the pinch of higher taxes, many U.S. consumers are likely to remain cautious.

In January, car sales slipped 0.1% from December but remained solidly higher than a year ago. And last month there were healthy sales gains at department stores, sporting goods shops and non-store retailers.

“There is no clear signal yet of a broad-based pullback in spending on the back of the tax hikes,” said Peter Newland, an analyst at Barclays Bank. While it remains to be seen how much of a hit the tax hikes will have this month and next, he added in a note to clients, “the degree of slowdown will not be so large as to prohibit a rebound in [economic] growth.”