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Payroll Tax Cut Expiration And Its Effect On Consumer

|Includes:DFS, JPMorgan Chase & Co. (JPM), QQQ, SPY, WMT

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

Stocks: JPM, SPY, QQQ, WMT, DFS