Retail sales eke out gains in January despite higher taxes

WASHINGTON — With higher payroll taxes starting to kick in, retail sales rose in January at their smallest rate in three months. Consumers pulled back a bit on their purchases of cars, clothes and home furnishings, the government said Wednesday.

Overall, retails sales ticked up a modest 0.1% last month from December, after gains of 0.5% in each of the prior two months. The subdued January performance was in line with consensus forecasts, as many analysts were expecting a drop-off in the growth rate after the expiration of the payroll tax holiday, which translates to about $40 less in take-home pay for the average worker every two weeks.

The latest Commerce Department figures are consistent with other indicators showing a weakening of consumer confidence at the start of this year, even as Americans are becoming somewhat more comfortable using credit again, said Kathy Bostjancic, an economist at the Conference Board.

Still, given the bigger bite in payroll taxes and higher income taxes for the wealthy, plus the recent jump in gas prices, some economists found it encouraging that there was any growth at all in retail sales last month. Analysts say the near-term outlook is for more modest gains in retail sales.

On the one hand, the pace of job and income growth has picked up some, and a continuing recovery in the housing market should help boost confidence and spending. But with likely additional cutbacks in federal government spending adding to the pinch of higher taxes, many American consumers are likely to remain cautious.

In January, car sales dipped 0.1% from December, but remained solidly higher from a year ago. And last month there were healthy sales gains at department stores, sporting goods shops and at non-store retailers.

“There is no clear signal yet of a broad-based pullback in spending on the back of the tax hikes,” said Peter Newland, an analyst at Barclays Bank. While it remains to be seen how much of a hit the tax hikes will have this month and next, he added in a note to clients, “the degree of slowdown will not be so large as to prohibit a rebound in [economic] growth.”

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