For some reason, many people are surprised to see a drop in their first paycheck of the year. Yet, everyone should have known the payroll tax deduction was supposed end January 1, 2013.
Perhaps people put faith in the notion that when it comes to politics, "temporary" typically means permanent. Of course, some people were likely oblivious to the whole thing, simply not paying attention to the original proposal and when it was set to expire.
To be fair, a temporary two-year Congressional measure that lasts precisely two years, might easily be considered "unexpected".
Consumers Cut Back on TP, Pampers, Huggies, Purina
Regardless of what people thought or expected, the Payroll Tax Takes a New Bite.
A temporary cut in Social Security withholdings gave Americans hundreds of extra dollars to spend over the past two years. But Congress allowed that break to expire during the wrangling over the fiscal cliff, meaning that Social Security taxes have reverted to 6.2% of salary from the temporary 4.2%.Payroll Tax Bite to Subtract .8% from GDP
Kari Barker, an accountant in Salt Lake City, recently received her first 2013 paycheck and realized that she and her husband will take home $250 less every month. "I used to be a diapers snob and would only buy Pampers or Huggies," Ms. Barker said. "Now I buy Target's house brand, because it's two-thirds the cost."
Procter & Gamble Co. (PG), which owns Charmin, Pampers and other brands, declined to comment, citing the company's scheduled earnings report this month. Huggies maker Kimberly-Clark Corp. (KMB) also declined to comment.
Roberton Williams, a tax economist and the Sol Price Fellow at the Tax Policy Center in Washington, said the expiration of the payroll-tax cut will leave the average American household with $18 to $20 less to spend each week, or $900 to $1,000 a year.
For the country's consumers as a whole, Mr. Williams said, that is a decline of $120 billion from last year. The total comes to about 0.8% of U.S. gross domestic product and is nearly equivalent to the most recent full-year sales at P&G, J.C. Penney Co. (JCP) and McDonald's Corp. (MCD) combined.
Edward Riggle, a 61-year-old in Virginia Beach, Va., said he noticed a nearly $40 increase in the amount of Social Security tax withheld on his recent pay stub. Mr. Riggle, a Vietnam War veteran who retired from the Navy in 1991 and now works at a military call center, calculated that he will pay $1,036 more in Social Security tax this year, a large unexpected decrease in his take-home pay.
In response, Mr. Riggle said he changed the withholding amounts for his federal and state taxes to make sure no excess cash is kept from his paychecks and is looking to save money on regular purchases.
On a recent shopping trip, Mr. Riggle and his wife decided not to buy their usual Charmin toilet paper and Purina One dog food, choosing less-expensive versions instead.
Bear in mind that analysts at J.P. Morgan reduced 4th quarter GDP estimates to .8% from 1.5%. Analysts at Morgan Stanley cut their forecast to 0.7% from 1.5%.
(For details, please see Global PC Shipments Decline 6.4%; Best Buy Sales Flat; Toys R Us Sales Decline 4.5%; 4th Quarter GDP Estimate Reduced to .8% from 1.5%).
Note that GDP is already well below the stall rate, which economists generally consider to be 2%. Thus, a .8% hit to GDP may contract growth, especially if consumers pull back hard in the first quarter.
If GDP does go negative, expect to hear ridiculous terms bantered about such as "technical recession".
Mike "Mish" Shedlock