January 6, 2011

Payroll Tax Windfall Will Be Spent: RBC Consumer Outlook Index

Consumer confidence ‘hovers’ close to ‘post-recession peak,’ but majority say America is on the 'wrong track'

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The one-year cut in payroll taxes that is part of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 will boost take-home-pay for all employees for 2011.

Most Americans, 74%, will spend “at least some of the extra money,” and 42% “expect to spend all or most of it,” according to the monthly RBC Consumer Outlook Index, released Thursday. The rest of those consumers, 26%, will “save all” the extra cash.

In real terms, this temporary tax cut, reducing the amount of OASDI tax withheld from 6.2% to 4.2%, for all of 2011 on the first $106,800 in wages. That’s up to $2,136 for the year. See “Outlook 2011, Tax Planning: Big Changes From Tax Bill; Extended Deadlines,” for more on this and IRS recommendations on implementing the cut; and more on estate planning in “Clarity Comes to Estate Planning With Tax Bill's Passage.”

Consumer Confidence

The overall RBC Consumer Outlook Index is 44.9 for January, just under the index’s “post recession peak” of 45.2—reached in December. The RBC Consumer Outlook Jobs sub-index gained slightly from December levels, to 52.1 from 51.8. The index has jumped 10 points year-over-year, from 42 in Dec. 2009.

“After rising for three straight months, confidence has taken a little breather here in January,” RBC Capital Markets Chief U.S. economist Tom Porcelli stated in the release. “But even with the modest pullback, we are still seeing a better backdrop of consumer confidence as we start the New Year. The jobs measure bucked the broader trend and posted a surprising rise—even in the face of weaker overall confidence and an unemployment rate that rose in December.”

Other sub-indexes were less rosy: the Current Conditions sub-index was slightly lower, at 35.0, from 35.6 a month ago. The Expectations sub-index also lost ground last month, to 55.3, from 56.1. The Investment sub-index dipped to 38.9, from 40.0 in December.

America ‘On the Wrong Track’

The survey also reported that 64% of Americans felt that “the country was on the wrong track,” up from 61% in December. And Americans are “wary about the overall direction of the economy,” according to the release. While 48% “think that the nation will continue struggling along in much the same condition as in the recent past,” 24% believe the domestic economy “will worsen,” while 28% “believe it will get better.”

Research and opinion firm Ipsos conducted the poll of 1,007 adults in the U.S. from Dec. 27-30, 2010.

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