Retailers Have Reason for Cautious Optimism

While many are still figuring out the winners and losers of the fiscal cliff resolution, retailers are hoping consumers will shrug off some of the concern that kept them from spending in the final weeks of 2012.

A key tenet of the agreement, which maintains current tax rates for individuals earning up to $400,000 ($450,000 for joint filers), is an end to the uncertainty that has kept people from knowing exactly what their tax liabilities were going to be going forward.  At the same time though, the agreement failed to extend the payroll tax cut that was enacted in 2011, meaning that most workers will see a decrease in take home pay beginning with their next pay period.

Retailers however, are betting that removal of the uncertainty over tax rates will provide the badly needed spark needed to ignite consumer confidence.  “This agreement might not be seen as perfect by everyone, but it gives American consumers and businesses the certainty they need to put worries over this issue behind them,” National Retail Federation (NRF) President and CEO Matthew Shay said in a statement.

North Andover, Mass. business owner Sam Ramey echoed those sentiments, when he told The New York Times:  “Once something gets settled, even if it’s not the most popular settlement option, it still gives you a sense of what the rules are and what you need to readjust.”

Retailers saw firsthand the impact of consumer concern over the fiscal cliff when, after an initial Black Friday burst of spending, consumers held back.  A report by the Conference Board found that its consumer confidence index – a key indicator of consumer behavior – fell sharply in December, to its lowest level in August.  Economist Pierre Ellis called the drop in confidence an “obvious confirmation that a sudden and serious deterioration in hopes for the future took place in December – presumably reflecting concern about imminent fiscal cliff tax increases.”

NRF Chief Economist Jack Kleinhenz found that if Congress and the President had failed to avert the fiscal cliff, the ensuing tax increases and spending cuts would have resulted in flat retail sales for 2013, with negative growth during the first half of the year.  Similarly, the White House projected that consumer spending could have decreased by $200 billion in 2013 if middle-class tax cuts had been allowed to expired.