Can Improved U.S. Retail Sales Continue In 2013?

The Commerce Department released its U.S. retail sales survey for December this morning (Tuesday) showing an unexpected increase - but does this gain have enough support to repeat in 2013?

Total retail sales were up by 0.5% compared with November, more than doubling the 0.2% average growth forecast by economists surveyed by Bloomberg.

The department noted U.S. retail sales would have been up by 0.8% if it had not been for a 14 cent-per-gallon decline in the average price of gasoline, which resulted in a 1.6% drop in sales at gas stations.

Why U.S. Retail Sales Improved

The increased U.S. retail sales came as an improved employment picture boosted incomes.

At the same time, housing prices are beginning to recover nationwide and this has led to an increase in housing construction activity. That's because a better outlook for housing construction means more demand for pickups and other light trucks.

"There's a big correlation between auto sales and housing starts," GM Treasurer Jim Davlin told Reuters. "The pickup truck market share is at historical lows. We would expect that to come back."

Sales of autos and auto parts were up by 1.6% month-on-month, the best performing category within the retail sector. December capped the best year for automobile sales since 2007.

U.S. retail sales excluding automobiles were up by 0.3%, also beating economists' estimates, compared with a 0.1% decline in November. Sales of furniture were up 1.4% from November while sales at clothing chains increased by 1.0%.

Core retail sales, which most closely correspond to the consumption component of gross domestic product (GDP,) also were up in December, by 0.6% after a 0.5% increase in November. Core retail sales exclude sales of automobiles, gasoline and building materials.

But the new tax law changes in 2013 threaten a continued recovery in U.S. retail sales...

Can Consumers Shrug Off Higher Payroll Taxes?

While it seems most consumers ignored the shenanigans in Washington over the fiscal cliff, it remains to be seen if spending will continue now that Social Security and Medicare payroll taxes have gone back up, leaving most taxpayers with less take-home pay.

Retailers serving low-income consumers are particularly concerned about the impact higher payroll taxes will have on their sales in January. Some economists expect higher payroll taxes will trim U.S. retail sales by as much as 1.2% in the January-March quarter.

Now that we are two weeks into the New Year, most consumers have already received their first paychecks of 2013 and can see the impact of the payroll tax increase.

For higher-income taxpayers, the effect will be negligible. But for those workers living from paycheck to paycheck, losing another $40 per paycheck to taxes can make a difference.

Companies serving lower-income taxpayers such as Wal-Mart Stores Inc. (NYSE: WMT), McDonald's Corp. (NYSE: MCD) and Dollar Tree Inc. (Nasdaq: DLTR) could see sales falter as their customers cut back on discretionary spending.

Most economists see the impact of the payroll tax increase abating in the second half of 2013 as workers get used to less take-home pay - but then, most economists probably don't live paycheck to paycheck.

A Goldman Sachs Group Inc. (NYSE: GS) report, citing a model put together by Christina and David Romer, suggests that workers will not get used to having less money to spend and that the impact of the payroll tax hike will be worse in the second half of 2013.

The Romer model agrees with the majority of economists that GDP will be held back by about 1% in the first half of 2013. But, while other economists see consumption reverting to the mean in the second half of the year, the Romers think consumption could fall by another 2.5%.

That means that GDP could be cut by as much as 3.5% for the full year, and that could tip the U.S. economy into recession.

Retail Sales in 2013

The outlook for consumption in 2013 really depends upon the outlook for housing and housing construction.

While sales of automobiles (particularly pickup trucks) and furniture, which are both closely related to housing, were positive, sales of building materials were flat after a 0.8% increase in November.

Investors should pay close attention to building materials sales in the first quarter, along with construction permits and other housing data, to see if the trends established in December will carry on through 2013.

Read more Money Morning coverage of U.S. retail sales.

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