US consumers take tax increase in stride, keep spending

It was not a good start to the year for US workers as their pay already hit by inflation came under further squeeze by a Social Security tax increase, AP reported today.

The question which many analysts were asking was whether consumer spending cuts would further slow down the economy. However, this has not happened yet.

On Friday, government figures revealed consumer spending was 3.2 per cent higher on an annual basis in the January-March quarter than in the previous quarter - the biggest increase in two years. The figures underscored a broader improvement in Americans' financial health that was blunting the impact of the tax increase and raising hopes for more sustainable growth.

Consumers had shed debt, gasoline was getting  cheaper, with increasing home values and record stock prices restoring household wealth to levels before the recession. Employers, meanwhile, are steadily adding jobs, which showed more people had money to spend.

According to Bernard Baumohl, chief economist at the Economic Outlook Group, the consumer should not be written off simply because of the 2 percentage-point increase in payroll taxes. He added, overall household finances were in the best shape in over five years.

Spending had certainly weakened toward the end of the January-March quarter and spending at retailers was down in March by 0.4 per cent, the worst showing in nine months.

AP reported that US consumers boosted their spending at the fastest pace in over two years in the first quarter, but they possibly pulled back in March as higher taxes ate into take-home pay.

According to economists, spending was unchanged in March from February, after rising 0.7 per cent in February, a survey by FactSet showed. Incomes were expected to rise 0.4 per cent.

Though consumers got off to a fast start on spending this year, the increase in Social Security taxes from 1 January was starting to pinch. Sales at retail stores and restaurants were down in March by the most in nine months.

Also, gas prices had fallen after peaking this year in late February, leaving US citizens with more money to spend on other things.

The commerce department said on Friday, that the economy expanded 2.5 per cent at an annual rate in the January-March quarter. This was much better than the 0.4 per cent growth that was seen in the fourth quarter. Growth was also helped by the largest increase in consumer spending in over two years.