Target, Wal-Mart and Macy’s are reporting disappointing second-quarter sales results. Target’s same store sales rose 1.2%, less than the growth rate in overall retail sales. The consumer is getting pinched by higher payroll taxes and mild wage gains.
Americans’ after-payroll-tax income rose 0.8% year-over-year. Pre-tax wages went up a steeper 1.9% year-over-year. The difference in growth rates is likely the result of higher payroll taxes. Higher taxes are not leaving much of a boost in workers’ take home pay.
This mild boost is more than offset by a 2.0% increase in July in the Consumer Price Index (CPI), leaving consumers hard pressed to continue the spending needed to keep the economy expanding at its current pace. These spending decisions are made even more difficult when you factor in that energy costs are up 4.7% year-over-year for the month of July and the cost of shelter is up 2.3%.
The slow squeeze on consumers could be eased by a larger increase in wages or a rollback on payroll taxes. Neither seems feasible right now. We are projecting that this spending squeeze will contribute to the mild downturn we are anticipating for 2014.