Consumer spending decreases as paychecks shrink

Consumer spending is down

If you think you are the only one skipping vacations, shopping at resale shops, carpooling and dining out less, think again. According to National Retail Federation in a recent poll, three- fourths of respondents said they were making small to drastic cutbacks to cope with recent tax and budgetary constraints leading to lower consumer spending.

While the president drones on about the wealthy paying their “fair share,” many in the middle class were surprised to find their first paycheck in 2013 decreased with the expiration of a two-year payroll tax “holiday”. This payroll tax increase decreased pay for workers making $30,000 per year by an estimated $100 per month. For workers who earned over $100,000 the loss of pay is close to $200 per month.

So how will consumers absorb the loss? In the survey almost half of the 5,185 people polled said they planned to spend less on overall purchases. Others said they would have to lower their consumer spending on entertainment, travel and dining out. The remaining said they would make smaller cost-cutting measures such as using less energy, spending less on splurges and driving less.

Higher Gasoline prices also hit consumers


If an increased payroll tax had been the only issue most consumers faced this year they could have absorb the loss, but consumers are also facing higher gas prices, which is unusual for February. Gasoline has hit an average of $3.80 in most of the U.S. but is closer to $4.00 in California and along the West Cost.

Experts don’t offer any good reason why gasoline prices have pushed so high. Common reasons include good economic news in the U.S. and China, which means more demand for crude, the crisis in the Middle East and/or the shutdown of several U.S. refineries.

Consumer spending down,  reflecting continued fear of recession


It’s interesting to note that not only do we have less money in our pay checks, consumers also seem to sense that we are not completely out of the recession. Sarah Quinlan, senior vice president for market insights at MasterCard Advisors, suggests this fear has made consumers more cautious about making discretionary purchases.

To confirm this theory Wal-Mart has reported less than stellar sales in February and a pull back in sales starting in January. Wal-Mart has also suggested the loss in sales is due to increased taxes and higher gas prices.

Business sitting on cash while consumer spending is down


It’s not just consumers who are leery about spending their cash. It’s estimated that corporations are sitting on $1.7 trillion in cash, but they not ready to start spending. Experts such as Russ Koesterich, the global chief investment strategist for BlackRock (BLK), believes the failure of businesses to spend their cash may be in large part because people aren’t spending their money.

“We won’t see a big surge in business spending until we see a surge in consumer spending,” Koesterich said. “You can explain one-third of business investment by looking at personal consumption.”

Another impediment to business spending is the U.S. budgetary issues. Businesses, like consumers, want to see a stable economy and an understanding of prospective tax changes before they can feel comfortable about the future. Maybe then we will see consumer spending soar.

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Beth L. is a content writer for Better Bankruptcy. Good content and information is one of many methods we utilize to bring you the answers you need.