This Great Graphic was posted on FT Alphaville from Credit Suisse. It shows the impact of the end of the payroll savings tax holiday on average weekly earnings.
Hourly earnings rose 2.1% in 2012. The 2% increased withholding here at the start of 2013, offsets last year's wage increase.
Research at the NY Fed found that people consumed between a quarter and half (28%-43%) of the tax break. This is more than they had said they would consume ex ante, or prior to the tax break, anticipated (10%-18%)
Yet with the tax holiday ending, consumption looks to take a larger hit. People have indicated the intention to cut consumption by more than 2/3 (71.4%) of the tax increase. Estimates project the restoration of the payroll tax, which is used to fund Social Security, will remove $110-$120 bln from the collective paycheck. The anticipated pullback in consumption translates to a drop of around $78-$85 bln.
This is one of the factors behind the subdued forecasts for Q1 US GDP. The Bloomberg consensus calls 1.6% annualized growth pace. This will come on the back of expectations that Q4 GDP was around half of the Q3 pace (3.1%). If these projections are borne out, it will be the first time during the recover that began in H2 09 in which the US economy expanded by less than 2% in back-to-back quarters.