February 13, 2013 / 1:38 PM / 4 years ago

Retail sales growth slows as higher taxes kick in

5 Min Read

A man walks past a shop while carrying a shopping bag in New York, December 26, 2012.Eduardo Munoz

WASHINGTON (Reuters) - Retail sales barely rose in January as tax increases and higher gasoline prices restrained spending, suggesting the economy got little help from consumers at the start of the year.

The Commerce Department said on Wednesday retail sales edged up 0.1 percent after an unrevised 0.5 percent rise in December.

The modest gain, which was in line with economists' expectations, suggested the expiration of a 2 percent payroll tax cut on January 1 and higher tax rates for wealthier Americans were weighing on the economy.

So-called core sales, which strip out automobiles, gasoline and building materials and correspond most closely with the consumer spending component of gross domestic product, ticked up 0.1 percent after gaining 0.7 percent in December.

"It adds to expectations that growth is likely to be lackluster in the opening quarter of the year, due mainly to the expiration of that payroll tax cut," said Joe Manimbo, a senior market analyst at Western Union Business Solutions.

Consumer spending, which accounts for about 70 percent of the U.S. economy, grew at a 2.2 percent annual rate in the fourth quarter. Economic activity slipped at a 0.1 percent rate in the final three months of 2012.

However, the retail sales report showed core sales were a bit stronger in November and December than previously reported. In addition, businesses outside autos accumulated slightly more inventories than earlier thought.

Taken together with a smaller trade deficit in December, this suggests the government will raise its estimate for fourth-quarter gross domestic product when it publishes its first revision to the data later this month.

Stocks on Wall Street rose, with the Standard & Poor's 500 index hitting its highest level since November 1, 2007. Prices for U.S. Treasury debt fell, while the dollar rose against the yen.

Spending Growth Momentum to Slow

With households facing smaller paychecks and gasoline prices marching higher, the pace of growth in spending is expected to slow this quarter. Prices at the pump have increased 30 cents so far this year.

While economists were encouraged that consumers had not retrenched, they cautioned it was too early to draw conclusions.

"By no means are we completely out of the woods when it comes to the impact of higher taxes," said Michael Feroli, an economist at JPMorgan in New York. "Evidence from past episodes suggest it could take up to two quarters for spending to fully adjust to new tax realities."

A softer pace of consumer spending is expected to hold back growth in U.S. GDP to a 1.8 percent annual rate this quarter, according to a Reuters poll of economists. For the year as a whole, economists expect growth of just 2.3 percent.

A separate report from the Labor Department showed higher oil prices helped push up the cost of imported goods by 0.6 percent last month. Import prices had fallen by 0.5 percent in December.

Still, non-petroleum import prices edged up just 0.1 percent in January and have risen just 0.2 percent over the past year, showing a lack of broad inflation pressure.

The Federal Reserve is likely to take solace in the tame non-petroleum import price reading and continue with its bond-buying program for several more months. The Fed is buying $85 billion in bonds per month and has said it will continue with purchases until the labor market outlook improves substantially.

Retail sales were mixed last month, with receipts at auto dealers slipping 0.1 percent after rising 1.2 percent in December. Excluding autos, retail sales increased 0.2 percent last month after advancing 0.3 percent in December.

Sales at building materials and garden equipment suppliers rose 0.3 percent, reflecting gains in homebuilding as the housing market recovery shifts into higher gear. Receipts at clothing stores fell 0.3 percent.

Sales at restaurants and bars were flat, while receipts at sporting goods, hobby, book and music stores rose 0.6 percent. Sales of electronics and appliances gained 0.2 percent, while receipts at furniture stores fell 0.2 percent.

Additional reporting by Jason Lange; Editing by Andrea Ricci

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