The payroll tax rose two percentage points to 6.2% as part of the deal established at the end of last year to avert the fiscal cliff, and consumer confidence has been down since the start of the year. As measured by The Conference Board, consumer confidence dropped nearly ten points in January from 68.1 to 59.5 due in part to the smaller paychecks many consumers received this year, he said. According to Kelly, however, that initial shock will not sink demand for the remainder of the year.
“We will get some disappointment in economic numbers, and that will have some impact on markets,” Kelly said in a presentation. “But overall we think the economy does have what it takes to weather a slowdown in the first half of the year.”
That is straining same-store sales numbers and hurting retail in the short-term even as the economy improved, Kelly explained.
“The thing that Americans mostly recognize is that their first paycheck for the first quarter got seriously dinged by that payroll tax,” he said. “And that is what is having an effect.”
Improvement in other areas of the economy and pent-up demand from the past couple years would offset the initial decline in consumer spending, he said. Kelly expected that a number of predictions on a strong rebound in the housing, automotive, and business equipment sectors would still ring true.
“With wealth going up and improvement in demand and a revival in housing, we think that will sustain the economy in the first half of the year,” he said.
As such, Kelly predicted that some of the most promising growth could occur in the second half.
“We think there will be stronger numbers in the second half of the year as some of the basic spending on consumer groceries and basic consumer services picks up again as people get used to these higher payroll taxes,” Kelly predicted.