Will the Payroll Tax Hike Hurt Growth?

The macro effect is murkier than the impact on specific stocks

   

The whole idea behind Congress’ decision to decrease the Social Security payroll tax during the Great Recession by 2% was to stimulate the economy. The theory was that Americans would spend that increase in their take-home pay. One might thus conclude that by rescinding the tax cut, the effect will be to slow the economy.

Well … yes and no. Several crosscurrents are at work. The first thing to understand is that that the U.S. economy, expressed as gross domestic product, has been growing at around 1% to 2% annually. The total amount of money that ended up in American pockets as a result of the Social Security tax cut was about $120 billion, or 0.8% of GDP.

This suggests that a good chunk of the growth we’ve seen was due to this specific measure.

Not so fast. That assumes every last cent of the payroll tax cut actually got spent. However, as I wrote last week, the American consumer has been deleveraging. That means they’ve been paying down their debt. It’s actually difficult to determine just how much of that extra money got spent versus how much went to paying off debt or to savings. Consequently, it’s difficult to determine just how much of the tax increase will get pulled from consumer spending.

So, from a macroeconomic standpoint, the effect isn’t clear. What is clear, however, is what’s going on at an individual stock level. We know that at least some of that $120 billion in tax savings was being spent in the consumer sector, and now it won’t be. That amount may be just a tiny fraction of GDP, but in the stock market, that’s a lot of money.

If even only a small part of it, say, $30 billion was being spent in the consumer sector, that’s $30 billion that won’t be spent anymore. This suggests that certain consumer stocks should be examined very carefully when deciding whether to buy, sell, hold or short.

Those whose behavior will be primarily affected will be families making less than $100,000 a year, give or take. It means they’ll have $2,000 less to spend. I’ll tell you where I don’t think you’ll see much impact, and that’s in higher-end retailers like Nordstrom (NYSE:JWN) or the hoity-toity folks who shop at Whole Foods Market (NYSE:WFM).

No, I think the mid-level retailers will feel it. I think you want to be wary about owning companies like Macy’s (NYSE:M).

I also think you want to be careful about food producers. Sanderson Farms (NASDAQ:SAFM), for example, may see reduced demand for its chickens. General Mills (NYSE:GIS), which is already struggling, could see fewer shoppers reaching for its products, much in the same way that supermarkets — also struggling — could see demand drop off. So, I’d avoid Safeway (NYSE:SWY) and Kroger (NYSE:KR).

The same goes for mid-level restaurant chains like DineEquity (NYSE:DIN) which owns IHOP and Applebee’s.

However, life isn’t all bad in the consumer sector. Low-price providers should do well as people tighten their belts. The dollar stores, including my favorite, Dollar Tree (NASDAQ:DLTR), should continue to do well, especially as they add grocery products to their shelves. Fast-food companies do fine in good times and fabulously in bad times, so McDonald’s (NYSE:MCD) is a great Dow choice for 2013.

Keep an eye on corporate earnings in the first half of this year. If growth at mid-level chains holds up, then we’ll have more evidence that people were deleveraging more than they were spending.

As of this writing, Lawrence Meyers didn’t own any securities mentioned here.


Article printed from InvestorPlace Media, http://investorplace.com/2013/01/will-the-payroll-tax-hike-hurt-growth/.

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