Towards the end of 2012, the headlines were dominated by the Fiscal Cliff, and the recession that would ensue should President Obama and Congress fail to reach a compromise. There were a lot of topics that were discussed, but one of the least discussed was the 2% increase in payroll taxes that were due to hit at the start of the year.
As it turned out, the 2% payroll tax hike did take effect. In January everyone's paycheck got a little smaller. This led to fear that consumer spending was going to slow down, but it hasn't.
In fact, people are spending more, and as a result are saving less. There are a couple different ways to view this development.
On one hand, it is a good thing that consumers are spending more. Consumer spending is such a vital ingredient to the health of the overall economy that the long-term benefit of higher spending is a good thing. But do we really want to put ourselves in a position of lower savings and higher spending? Is this not exactly what led to the last recession?
There are two reasons consumers have not been slowing down on their spending. The first is that the housing market has been improving. Home values have been rising, and while the increase does not make anyone richer, it does relieve some of the strain that homeowners were feeling when their home values were steadily falling in recent years.
The other thing that has kept consumer confidence high is the recent surge we have seen in the stock market. The major indices are all trading at near record-high levels, and seeing our retirement accounts and trading accounts move higher gives us added confidence that the economy is improving and we should be able to spend a little more money, despite the higher taxes we are paying each month.
The automobile industry in particular has been strong. The major auto-makers have forecast their best year since 2007, and February saw an annualized rate of 15.3 million vehicles sold. In addition to a strong auto industry, furniture sales are up as are retail-clothing sales.
During the month of January, incomes fell the most in 20 years, and yet consumer spending rose 0.2%. How did spending rise when incomes were falling… its simple, the savings rate fell from 6.4% to 2.4%. You have to ask yourself is this really a good thing?
It’s a very slippery slope. We have to see consumer spending continue to rise, but we also have to make sure we do not become so loaded with debt that we are setting ourselves up for disaster.
As of the end of 2012, consumers had $833 billion in outstanding credit card debt, up from $830 billion at the end of 2011.
There are reasons to be encouraged by the overall economy, but remember the lessons you learned during the recent recession and avoid assuming more debt than you can handle.
Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.