U.S. consumers may be getting ahead of themselves

December 29, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

NEW YORK — Americans may feel less confident, but they didn’t let that get in the way of holiday cheer. Enthusiastic shoppers pushed retail and services sales up 5.5 percent in the run-up to Christmas, according to MasterCard Advisors. Next year’s payroll tax cut for the 90 percent of the working population that still has jobs should keep the nation’s malls bustling in 2011, but the temporary stimulus can only do so much. The housing market offers a cautionary tale.

Home prices are ready to go negative again. In fact, the S&P/Case-Shiller tracker of 20 metropolitan areas already has. It fell 0.8 percent in October, erasing the gains seen earlier this year when the government’s home tax credit pushed fence-sitters to buy new homes. That program expired in April. Home prices have been falling since May.

The two-percent payroll tax cut negotiated as part of a broader $900 billion tax stimulus package will be felt immediately in consumers’ paychecks, giving them added incentive to hit the malls. The labor market may be terrible with nearly 10 percent of Americans out of a job, but it has stabilized. That means those with a job should feel more comfortable spending their “pay raise” rather than squirreling it away.

The problem with relying on this fix, like the home tax credit, is that it’s temporary. Congress only approved the tax cut for a year. Unless the economy starts cooking and employers, rather than the government, beef up wages, the retrenchment in spending in 2012 could be impressive. A year is long enough for workers to get used to a bigger paycheck. When it  ends, it will feel like a pay cut rather than a return to “normal.”

And the nation’s mood remains anything but exuberant. An industry group said Tuesday that consumer confidence actually fell in December, rather than improving as many had expected. With energy costs continuing to rise and home prices falling, consumers could become even more watchful. And that could muffle the bang from the stimulus even before it expires.

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So much for the Paradox of Thrift thingy.

Posted by ARJTurgot2 | Report as abusive