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ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.

The close relationship between U.S. disposable income and retail spending is easy to understand – the more money people have that isn't earmarked for something else, the more they are likely to spend. What doesn't make sense? Why some economists believe that a two per cent decline in income won't be reflected in retail spending.

American workers got an unwelcome New Years gift in 2013 – a 2 per cent hike in payroll taxes. Credit Suisse analyst Gary Balter estimates that, for those making $40,000 per year, the extra tax will reduce disposable income by between seven and eight per cent.

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The chart shows why this could be a very big problem for U.S. retailers. Again from Credit Suisse, economist Neal Soss notes that 99 per cent of changes in spending can be explained by levels of disposable income. With consensus estimates pointing to a 2 per cent decline in personal income for January, revenues for retailers are likely to follow suit.

Rising anxiety levels are already apparent at Wal-Mart. In an email leaked to Bloomberg, the company's Vice President of Finance and Logistics called February sales "a total disaster." Investors could get more colour on the trend Thursday when Nordstrom reports earnings and offers forward looking guidance after market close.

Given the connection between disposable income and spending, it is surprising (and possibly wishful thinking) that U.S. economists believe personal spending in January will rise 0.2 per cent in January while disposable income drops. When the data is released March 1, we'll see if they're right.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.

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