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Analysis: Americans to Face Tougher 2013 on Rising Prices, Taxes

Posted on October 25, 2012
Filed Under Economics, Jobs | Leave a Comment

Reuters) – Consumers will have to dig deeper into their pockets next year to pay for costlier healthcare, more expensive grocery bills and higher taxes, an extra drag on the country’s already slow-moving economy.

The additional outlays look set to test the resilience of consumers, whose spending accounts for around two-thirds of the U.S. economy.

“We think it’s going to be a difficult six to nine months,” said Scott Hoyt, senior director of consumer economics for Moody’s Analytics. “If anything, conditions are likely to get worse, particularly at the start of the year.”

The strength of consumer spending has surprised some economists, given unemployment near 8 percent and anemic wage growth. Consumer spending has cushioned the blow to the United States from slower foreign demand for its goods.

U.S. households have shed about $880 billion in debt since the peak in the first quarter of 2008, according to Federal Reserve data. That has put many consumers on a path back to financial health.

But an expiration of payroll tax cuts in early January and a spike in food prices could wipe 0.8 percentage points off U.S. economic growth next year, according to some economists.

The economy is now expected to expand 2 percent in 2013, down from 2.1 percent in 2012, a Reuters poll showed.

Consumer groups are noting caution on the part of households when it comes to such things as taking on more debt, retirement savings and gasoline prices.

“People are very concerned about what is going to happen next year because they are already seeing price increases that are affecting their budgets,” said Bruce McClary, a spokesman for Clear Point, a nationwide credit counseling organization that helps consumers experiencing problems with debt.

“They are also worried about any kind of changes that might be happening with regard to their income tax, that they are going to have less disposable income to work with,” he said.

Economists at JPMorgan say expiration in January of a temporary 2 percentage-point cut in the payroll tax would reduce household spending by $125 billion and lower gross domestic product by about 0.6 percentage point next year.

Still, loss of the payroll tax cuts would be only one aspect of the “fiscal cliff,” a popular name for automatic across-the-board spending cuts and tax increases that would suck about $600 billion out of the economy next year.

U.S. lawmakers are expected to find a way to soften the blow of most scheduled tax hikes, including income taxes, and spending cuts due to take effect from January 1. But if they don’t, the tax increases and spending cuts could result in the most severe belt-tightening in the United States since a tax increase in 1969 to pay for the Vietnam War.

FOOD, HEALTHCARE, EDUCATION

Another area of concern for consumers is food prices. Rises in the prices of corn and soybeans and other field crops as a result of drought this year in the U.S. Midwest are expected to feed through into food prices late this year and in early 2013.

U.S. soybean prices jumped 40 percent over the summer, while wheat shot up about 50 percent. Prices have eased a bit since then, but the increases are expected to filter down to consumers.

“We are starting to see evidence of food prices moving up so that’s definitely going to be a drag on disposable incomes,” said Hoyt of Moody’s Analytics.

The U.S. Department of Agriculture sees food price increases of 3.5 percent to 4.0 percent next year, greater than this year.

Hoyt says that could cut 0.2 percentage point from economic growth over the winter, when food prices could peak.

Reflecting the strain on many budgets, U.S. shoppers plan to spend an average of about $750 on gifts, decorations and other holiday items this season, only 1.2 percent more than a year ago, according to a recent survey published by the National Retail Federation.

That would be the smallest increase since 2008-2009, when holiday sales fell 1.8 percent during the financial meltdown.

“You could argue that we are still at recession levels on a lot of the consumer indicators,” said Jeffrey Cleveland, a senior economist at investments manager Payden & Rygel in Los Angeles. “I don’t expect the consumer to be a powerhouse.”

Another big extra outlay will be in healthcare premiums, which on average are costing employees more than $2,200 in 2012, according to Aon Hewitt, a human resource consulting firm.

Average health care premiums are forecast to jump by 6.3 percent in 2013, according to Aon Hewitt

Over the last five years, employees’ share of healthcare costs will have increased more than 50 percent, it said.

On top of everything else, the cost of a college education is being felt more keenly by many Americans.

Tuition costs for the 2012-13 academic year rose again but federal grant aid and tax benefits did not increase in the previous year – the most recent for which data is available – according to a report published on Wednesday by the College Board Advocacy & Policy Center.

The pain of higher living costs is not being felt evenly.

Households with incomes under $75,000, people older than 50 and those with lower levels of education believe their financial positions are getting worse, according to a survey by Bankrate.com, a research firm specialized in consumer finance.

“A lot of low- and middle-income households are mired with a stagnant income at a time when food and energy costs keep moving higher,” said Greg McBride, a senior financial analyst at Bankrate.com.

(Additional reporting by Jilian Mincer)

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