The shrinking paycheck
Since the passing of the American Taxpayer Relief Act (fiscal cliff bill), there has been a sense of optimism and relief in the markets. While we agree it is good news that Washington avoided falling off the cliff, this was only a partial deal and the Three Gorges – sequester, debt ceiling and continuing resolution – are still outstanding. As these are resolved in a likely messy fashion, uncertainty will remain high and markets on edge. Meanwhile, there is an even more direct drag on the economy: tax hikes. The combination of the payroll tax hike and higher taxes for upper income households will reduce disposable income and weigh on consumer spending.
We are therefore adjusting the components of our Q1 GDP forecast, revising down consumer spending to 0.5% from our prior estimate of 1.3%. This will be offset by stronger investment related to Hurricane Sandy rebuilding. As such, our forecast for growth is unchanged at 1.0% for Q1.
Read the full report here.