Consumer confidence fell again last week, raising the risk that the payroll tax increase that kicked in at the start of the year will make it difficult to sustain a pickup in spending.
The Bloomberg Consumer Comfort Index dropped to minus 37.5 in the period ended Jan. 27, the fourth consecutive decrease and the lowest reading since October. Other reports showed claims for jobless benefits rose more than forecast last week and business activity picked up in January.
Income is set to drop after surging in December by the most in eight years as the levy used to fund Social Security benefits climbed by two percentage points this month. A report Friday is projected to show employment grew in January by the most in five months, pointing to further progress in the labor market that may help cushion the blow from the tax-induced cut in take-home pay.
“We expect a short, sharp shock at the beginning of the year,” said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut, who correctly projected the gain in spending for December reported by the Commerce Department. “Consumer spending will slow this quarter and then gradually pick up steam as the year goes on.”
Stocks fell, after the best start to a year for the Standard & Poor’s 500 Index since 1997, as investors weighed earnings and economic reports while awaiting tomorrow’s jobs data. The 500 Index declined 0.2 percent to 1,499.03 at 12:24 p.m. in New York.
There was good news on the jobs front elsewhere Thursday. German unemployment unexpectedly declined in January, adding to signs that a pickup in Europe’s largest economy is gathering pace, figures from the Nuremberg-based Federal Labor Agency showed.
In the U.S., claims for unemployment benefits increased by 38,000 to 368,000 in the week ended Jan. 26, partially erasing a combined 45,000 slide in the prior two weeks, figures from the Labor Department showed Thursday. The see-saw in applications highlights the government’s difficulty in adjusting the data from seasonal swings after the holidays and at the start of a quarter.
“It looks like the underlying trend in claims is just stable at around 360,000, which is where we were for much of 2012,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York, who projected 367,000 filings. “The low readings from early January were distorted.”
Payrolls climbed by 165,000 workers in January after increasing by 155,000 last month, according to the median forecast of economists surveyed by Bloomberg ahead of the Labor Department report Friday. The jobless rate is projected to hold at 7.8 percent, where it’s been since November.
Sustained advances in hiring are helping underpin consumer spending. Purchases rose 0.2 percent in December after a 0.4 percent gain the prior month, the Commerce Department reported. Incomes rose 2.6 percent, the biggest gain since December 2004, the month Microsoft Corp. paid a special divided.
After-tax income rose at a 6.8 percent annual rate from October through December, the biggest increase since the second quarter of 2008, a report showed.
In addition to improving wages and salaries, some companies paid dividends and employee bonuses earlier than usual before tax rates went up this year. The Commerce Department estimated about $26.4 billion of the increase in incomes at an annual rate last quarter was attributable to early dividend payments and another $15 billion reflected bonuses and other types of irregular pay.
That signals the surge in incomes last quarter will be reversed in the first three months of 2013, when those payments took place in prior years.
“It is relatively safe to say that disposable income is heading south in January due to the expiry of the payroll tax cut, and the payback on the quarterly dividends,” Chris Christopher, an economist at IHS Global Insight in Lexington, Massachusetts, said in a research note.
The pickup in spending from the end of last year may be helping spur manufacturing at the start of 2013 as another report showed business activity expanded more than forecast in January.
The MNI Chicago Report’s barometer rose to 55.6 this month, the highest since April, from 50 in December. A reading of 50 is the dividing line between expansion and contraction. Measures of orders and employment led the increase.
The report contrasts with previous data that showed factory activity in the Philadelphia and New York area shrank this month as the risk of automatic government-spending cuts looms.
“The forward-looking indicators in the index were especially strong, which is encouraging,” said Millan Mulraine, a New York-based economist at TD Securities LLC, who projected an increase in the Chicago measure. Nonetheless, “we have to give some credence to the other regional reports as well.”
The economy shrank at a 0.1 percent annual rate in the last three months of 2012 as the biggest drop in military spending in 40 years swamped gains for consumers and companies, a report showed.
Household spending, which accounts for about 70 percent of the economy, expanded at a 2.2 percent annual rate, up from 1.6 percent in the third quarter. Such a gain is unlikely to be repeated in the first quarter.
The four-week slump in the Bloomberg Consumer Comfort Index is the longest since August. Two of its three components declined last week. The buying climate measure fell to minus 44.4, the weakest since September, from minus 42.8.
The personal finances barometer dropped to minus 3.8 from minus 1.8 the prior week. The index assessing Americans’ views on the current state of the economy improved to minus 64.1 from minus 64.6.
MasterCard Inc., the second-biggest U.S. payments network, posted fourth-quarter profit that beat analysts’ estimates as customers made more purchases. The Purchase, New York-based company has a “cautious outlook” for 2013, Chief Executive Officer Ajay Banga said today on a conference call with analysts.
The comfort report showed the sentiment gauge for those making more than $100,000 a year turned negative last week for the first time in three months. Sentiment among Americans earning $50,000 or more fell to minus 16.5, the lowest reading since October. A worker earning $50,000 is taking home about $83 less a month because of the payroll tax increase that took effect this month.
Corning Inc., which makes glass for flat-panel televisions, phones and tablets, is among companies saying consumer spending has held up.
“We do not feel like we’ve seen this big downdraft from the United States from the payroll tax rolling back on,” Jim Flaws, vice chairman and chief financial officer of the Corning, New York-based company, said on a Jan. 29 earnings call.
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