Search ForexCrunch

The fiscal cliff was supposedly averted at the turn of the year, as Democrats and Republicans reached a last minute deal that would prevent tax hikes for the vast majority of Americans.  However, one wide reaching tax was hiked: the payroll tax break was left to expire, squeezing the amount of spare cash in many Americans’ pockets.  

There are some reports that this hike is hurting spending. But could this stop the recovery?

Update:  US retail sales came out better than expected. At the moment, US consumers remain strong.

The tax was first felt only in February, when January payrolls came in.

  • In mid-February, a Wal-Mart executive called the February sales “a total disaster”, blaming the payroll tax, and also tax returns.
  • Then, another big retailer, Target also warned about weak sales during February. Gasoline prices and also the payroll tax were blamed.
  • Another report says that sales were moderate during February.  February “was a challenging month,” said Barbara Kahn, director of the Baker Retailing Center at the Wharton School. ” She mentioned the payroll tax as a negative.

So, it seems that the expiration of the tax break had a negative impact on the US consumer. However, this is not the only reason for lower sales: various other issues also had an impact, and there were some positive things as well.

The Non-Farm Payrolls report for February was excellent: the pace of job gains accelerated to 236K, significantly above the averages of recent months.

The retail sales report for February will probably shed some more light, but it will certainly not seal the debate. First, the data undergoes revisions. Secondly, one month is certainly not enough to know.

So, at the moment it is impossible to say that the expiration of the payroll tax cut has significantly hurt the US economy or has ended the recovery as some had suggested. So, it did not fall off the cliff, but perhaps it fell off a ledge.

The Federal Reserve releases its next decision on March 20th. It will be interesting to watch the reaction by the central bank, which has a huge impact on currencies.

Further reading:  Currency Wars Continue Moving Markets