Unexpectedly Intriguing!
February 28, 2013

This may begin to change as early as later this morning, but considering that U.S. FICA payroll taxes were increased by 2% at the beginning of 2013, thereby reducing most working Americans take-home pay by a similar percentage of their income, we would have expected to see the effect show up in higher levels of new jobless claims. Our chart below shows where they officially stand through the week ending 16 February 2013, which really describes the job layoff picture that existed in the U.S. some two to three weeks earlier, between 26 January and 2 February:

Residual Distribution for Seasonally-Adjusted Initial Unemployment Insurance Claims, 19 November 2011 - 16 February 2013 (initial)

Essentially, outside all the explainable volatility that has characterized the period since 22 September 2012, the current trend remains flat, which suggests several possibilities that might account for the so-far curious lack of reaction to the negative impact of higher payroll taxes:

  1. There is positive economic growth in the U.S. that is offsetting the negative effect of higher payroll taxes on consumer spending, particularly in U.S. housing markets, which saw a fiscal-cliff driven surge at the end of 2012 that is still unwinding.
  2. The fiscal cliff standoff at the beginning of the year delayed the implementation of new payroll tax withholding rates, so a lot of people are only just starting to see their reduced take-home pay (at least through the week between 26 January 2013 and 2 February 2013 - per the fiscal cliff deal, the IRS gave U.S. employers until 15 February 2013 to implement the final tax withholding rates for 2013).
  3. People perhaps pay closer attention to the money they personally spend than to money that is taken out of their take home pay before they get it, which means they may react more to higher prices that they have to pay out of pocket (I'm paying way too much for gas!) than they do higher tax withholding (I just never had that much money to begin with!)
  4. Conditioned by the recent recession and jobless recovery, employers have developed strategies to deal with people suddenly having less money to spend, making it possible to maintain a more stable number of employees on their payrolls.

As for whether or not the 2% of income hike in payroll taxes is having a negative effect on the U.S. economy, it definitely would seem to be taking a toll:

Wal-Mart Stores Inc. on Thursday joined a parade of retailers, restaurants and consumer-goods companies worried about the economic impact of the recently restored federal payroll tax that has left Americans with less money to spend.

The world's largest retailer, Burger King Worldwide Inc., Kraft Foods Group Inc. and others are lowering forecasts and adjusting sales and marketing strategies, expecting consumers with smaller paychecks to dine out less and trade down to less expensive purchases.

The expiration of the payroll tax cuts that knocked 2% off consumers' take-home pay is having an impact, these companies say. It will ding a household with $65,000 in annual income $1,300 this year, and shift $110 billion overall out of consumers' hands, estimates Citigroup.

The average U.S. household in 2012 had an annual income of $69,667, which would see its take-home pay reduced by just shy of $1,400. Meanwhile, the the median U.S. household had an annual income of $50,054, so its take home pay will be reduced by just over $1,000 thanks to President Obama's desire to increase the payroll tax rate on wage and salary income.

Interestingly, the same article provides some evidence of our fourth option, which suggests that employers have become better able to cope with Americans having less money to spend:

Now, Wal-Mart is stocking more of its shelves with cheaper products, and smaller-size packages of diapers, toilet paper and snacks. Burger King is cutting its Whopper Jr. sandwich to $1.29 from about $2, and focusing advertising on its value menu items rather than higher-price salads or smoothies.

Kraft and meat supplier Tyson Foods Inc. are introducing more lower-priced products to help restaurants and supermarkets adapt to the consumer spending downshift.

These companies say the changes could be long-lasting and are revamping operations to better cater to consumers pinched by higher taxes, stagnant wage growth and rising gasoline prices, which jumped nearly 50 cents a gallon in the past month alone.

No matter what, that these major retailers, restaurants and suppliers have these strategies ready to go so quickly just doesn't speak well to their expectations for the nation's economic situation in 2013.

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