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Payroll tax to blame for U.S. consumer confidence nose-dive: economists

(Xinhua)

13:32, January 30, 2013

WASHINGTON, Jan. 29 (Xinhua) -- While New Years' fiscal cliff deal averted a U.S. economic meltdown, the payroll tax hike included in the agreement caused consumer confidence to take a nose-dive, economists said Tuesday.

U.S. consumer confidence plummeted in January to the lowest level in more than a year, according to a report by the Conference Board and released Tuesday, which saw the index drop to 58.6 from 66.7 in December, falling short of economists' expectations of 64.

"Higher payroll taxes definitely took a bite out of consumer confidence in January," said a Wells Fargo report released the same day.

"Consumers were likely surprised when they received their first paychecks of the year and noticed that their social security payroll taxes had risen 2 percentage points and that their take home pay had shrunk," Wells Fargo said.

The news comes on the heels of the fiscal cliff deal earlier this month that averted another recession but included a payroll tax hike that economists warned would impact consumer spending, the driving force that propels the U.S. economy.

While higher taxes can hurt the economy even in good economic times, the tax increase comes amid a weak recovery from a downturn that saw 19 trillion U.S. dollars of Americans' wealth wiped out between 2007 and 2009. Three years later, millions continue to struggle to make ends meet, millions remain jobless and millions more can only find part-time work.

"The story is that we still have a tremendous number of households that continue to experience very slow income growth in general because of overall economic conditions," said Michael Brown, economist with Wells Fargo, adding that the tax hike squeezes household budgets.

"Those very discretionary things, going to movies, dining out, those would probably be hit first," he said of what Americans will cut as a result of the tax.

Lynn Franco, director of economic indicators at The Conference Board, said the tax has "undoubtedly dampened consumers' spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock."

That could be bad news for jobs, as employment in the U.S. is often driven by consumer spending, and Wells Fargo noted the proportion of consumers who expect their income to slide over the next six months surged 3.8 percentage points.

That is the "highest it has been since March 2009, when the economy was 30 percent still in the midst of the recession" Wells Fargo said.

Aside from the payroll tax, there remains uncertainty over President Barack Obama's health care overhaul and the financial reforms passed in his first term, with corporations piling up cash but hesitant to deploy those funds, economists said.

Still a number of other economic indicators are up: Banks are healthier; household finances are in the best shape in five years; the stock market is doing well; and the housing market is making a comeback.

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