Remember the “fiscal cliff”? It’s now become a leaky pipe, trickling everywhere and annoying everyone.
The dampening influence of the deal to fix the U.S. budget will be felt by the vast majority of Americans in 2013. Thanks to the end of the payroll tax holiday, the average person’s disposable income will drop by 2 per cent – an amount that might not loom large in the minds of affluent consumers, but that could represent real hardship to those who are already living close to the edge.
For most U.S. consumers, the payroll tax increase is bad news. For companies that depend upon consumer spending, it’s also an unwelcome development.
Yet the stock market rallied as soon as Congress passed its legislation, and is still in good health. Investors are obviously feeling in good spirits despite the new pinch on consumers’ wallets. And that points out a simple but important fact: Most investors aren’t average Americans.
“There’s a crude surprise waiting for most homes when they get their first paycheque” this year, said Tom Porcelli, RBC Dominion Securities’ chief U.S. economist, meeting with reporters last week.
For its latest Consumer Outlook Index, RBC surveyed Americans after Congress legislated its way off the cliff and ended the payroll tax holiday. It found that 57 per cent of households plan to reduce their spending given the fall in their take-home pay.
Yet money is still flowing into equities. The S&P 500 has risen 3 per cent since Jan. 2, while the Dow Jones Industrial Average is up a similar amount.
Why the disparity between consumer reality and stock performance? It comes down to who is investing. According to RBC’s research, it’s upper income earners who are buoying the market.
Mr. Porcelli predicts consumers will draw from their savings this year to push consumption up by a very modest 2 per cent, but says most Americans are too preoccupied with “deleveraging” – reducing their debt loads – to put money into the stock market.
“The consumer is really trying to pare down debt,” he said.
The full effects of the payroll tax hike may not yet be a factor in many Americans’ thinking.
In a survey this past November, RBC found that only about 60 per cent of households that earn more than $75,000 a year were cognizant of the looming tax bite.
The knowledge gap widened even further down the income scale. Only about 35 per cent of Americans with an annual income of less than $50,000 were aware their discretionary income could decline because of the payroll tax. That suggests many Americans have yet to confront their own fiscal cliffs. When they do, the stock market may yet feel the effects.