The American economy, as with most developed nations, is based primarily on consumer spending. With the collapse in the housing and stock markets several years ago, a big chunk of wealth evaporated overnight. This hurt consumer sentiment, which resulted in a significant slowdown in economic growth.
For economic growth to regain momentum, consumer spending needs to increase, but it needs to be based on a solid footing. It’s one thing if consumer spending was increasing due to higher disposable income, but it’s quite another if consumer spending was increasing due to higher levels of debt, which would lead to fragility when it comes to long-term economic growth.
New data from the Commerce Department stated that personal income declined by 3.6% in January, far worse than economists had expected. However, personal consumption increased by 0.2% in January. (Source: Sparshott, J. and Morath, E., “U.S. Incomes Fall, Spending Rises,” Wall Street Journal, March 1, 2013.)
The higher payroll tax is clearly hurting disposable income for most Americans. Disposable income, which is the amount of income left after taxes, decreased by four percent in January. According to the United States Department of Commerce, this is the largest decline on record. With economic growth being extremely weak, this type of decrease in income has the potential to severely impact consumer spending for some time.
This information was collected prior to sequestration. If budget cuts are to be enacted without revisions, it will be difficult to see how economic growth will accelerate through the remainder of the year. Consumer spending will most likely suffer at some point, because incomes are not growing, taxes are rising, and budget cuts are now being enacted.
This does not look like a recipe for a substantial increase in consumer spending or economic growth.
Companies that rely on mid-level consumer spending might suffer this year. If the reality of sequestration takes hold, many more households will reduce consumer spending as worries over job losses grow. The lack of income growth combined with higher taxes will mean less money in the pockets of average Americans.
Those in the higher income tax bracket won’t be as severely affected. It’s the average American who only has a limited amount of after-tax dollars that will feel the pain, and they will have no choice but to reduce consumer spending.
We are already seeing the decline in revenues of companies that cater to middle-income consumers, such as Sears Holdings Corporation (NASDAQ/SHLD). I think there is the potential for economic growth to remain relatively weak and for consumer spending to be affected for the remainder of 2013.
At this point, we certainly can’t look to Europe for economic growth, as that continent has massive problems. Consumer spending there has continued to decrease, which isn’t a surprise, considering that many parts of that continent are in a recession and perhaps even a depression.
The real question is: can the private sector absorb the cuts from sequestration and provide enough momentum to generate any economic growth in the second half of 2013? If we see consumer spending beginning to decline substantially, this could be a serious issue for many companies.
Unfortunately, much of this uncertainty rests with politicians. It’s impossible to predict how politicians will act. While I hope they’re able to work together on a comprehensive deal that ensures long-term stability and financial viability for America, I am as pessimistic as most Americans.
Putting all our faith in the hands of Washington’s politicians is extremely risky. I would much rather encourage economic growth from the bottom up, supporting individual businesses across the country. I believe that we should do whatever we can to support business creation and expansion, not the fallacy that economic growth is somehow created by the government.
By: Sasha Cekerevac
Posted: March 5, 2013, 7:46 am
We believe the stock market and the economy have been propped up since 2009 by artificially low interest rates, never-ending government borrowing and an unprecedented expansion of our money supply....