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Vikrant Sitani, CFA
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Vikrant Sitani, CFA is currently working at well known Financial Services Company. Vikrant holds MBA from Virginia Commonwealth University and is Chartered Accountant from India.
  • Payroll Tax Cut Expiration And Its Effect On Consumer 1 comment
    Mar 4, 2013 8:29 PM | about stocks: JPM, SPY, QQQ, WMT, DFS

    Many companies have forecasted different effects on the payroll tax cut expiration. Companies are concerned about sales and financial institutions are concerned about credit. To know how consumers will react to the expiration of the cut, I looked at how consumers reacted to the cut in 2011. The cut of 2% on payroll tax had an effect of boosting consumer's income. New York Federal reserve had conducted the study in May 2012 on how consumers thought they will do with additional cash and what they actually did with the additional cash.

    As usual consumers thought they will save more and pay off the debt, however they did not save or pay off the debt as much they thought they will do. Consumers are usually very optimistic on spending less and saving more. Below is the table from that study. The distribution is spread evenly between spending (consume), save and pay off of the debt. Therefore it is quite likely with this payroll tax cut expiration; the actual effect will be on all three and not just on consumption. Since the effect is on all three categories, its impact on either the spending of delinquency will be limited. It is quite likely that there may be some increase in delinquency or increase in credit card usage as consumers would not be paying off the debt.

    Intended and Actual Use of 2011 Payroll-Tax-Cut funds

     

    Intended Use

    Actual Use

    Mostly consume

    8.8

    35

    Mostly save

    39.8

    26

    Mostly pay off debt

    50.3

    36

    Source: NY Federal Reserve

    Here is the link to the study.

    libertystreeteconomics.newyorkfed.org/20....html

    Themes: Macro View, GDP, Economy, Consumer Stocks: JPM, SPY, QQQ, WMT, DFS
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    Author’s reply » Payroll Tax Cut Expiration and its effect on Consumer.
    4 Mar 2013, 08:30 PM Reply Like
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