January retail sales increased by only 0.1 percent

320px-Cash_RegistersRetail sales saw sluggish growth in January, increasing only 0.1 percent, due in part to higher taxes and rising gas prices, which could mean only modest growth during the first quarter of the year.

The slight increase may be attributed to a two percent payroll tax cut on that took effect at the beginning of last month and higher tax rates for wealthier Americans. Economists, however, said that consumer spending was unlikely to be affected much, given rising stock prices, moderate job growth and an increase in home values, Reuters reports.

“We are starting to see the impact of higher taxes, but we have a positive wealth effect from increasing house prices and a boost from equities,” Robert Dye, the chief economist at the Dallas-based Comerica, said, according to Reuters. “My expectation is that consumers are able to continue to increase spending but only moderately.”

The effect of tax increases especially affected restaurant and bar sales, which were flat, while clothing and furniture stores, hobby, book and music stores, and electronics and appliance stores saw sales increases.

Core sales, which exclude gasoline and automobiles and account for the consumer spending aspect of GDP, increased by 0.1 percent in January. Consumer spending, which accounts for approximately 70 percent of the American economy, grew at an annual rate of 2.2 percent in the fourth quarter of 2012, offsetting the economic effects of slower inventory accumulation and reductions in defense spending, Reuters reports.

Consumer spending growth is expected to be lower than the fourth quarter numbers, between 0.7 percent and 1.8 percent, as American households adjust to pay cuts and high gas prices. Gasoline prices have increased 30 cents per gallon since the beginning of the year. Some economists said that consumers have maintained their spending despite their smaller paychecks but added that sales could remain weak in coming months.

“By no means are we completely out of the woods when it comes to the impact of higher taxes,” Michael Feroli, a JPMorgan Chase economist, said, according to Reuters. “Evidence from past episodes suggests it could take up to two quarters for spending to fully adjust to new tax realities.”

Economists predict that GDP growth in the first quarter will be limited to 1.8 percent, though they predict 2.3 percent GDP growth for 2013.

Comments are closed.