"Cautious" Consumers Still Plan to Spend Tax Cut

Americans may be paying off more of their debt and saving more, but almost three-quarters plan to spend at least some of the Social Security tax cut they expect to receive, according to the monthly RBC Consumer Outlook Index, which was released on Thursday.

This is good news for consumer spending in 2011, which many on Wall Street expect to lag, dragging down GDP. In fact, 42% say they plan to spend all or most of the one-year Social Security payroll-tax reduction that became effective January 1, 2011, while only 26% said they plan to save all of the tax cut.

Yet 64% of Americans say the country is on the “wrong track,” up from 61% last month. This is the ninth consecutive month it has remained above the 60% level. At the same time 36% of respondents say the country is headed in the right direction.

In general, Americans are pessimistic about the economy. Twenty-four percent believe the economy will worsen in the next year, about the same number as believe it will improve. Meanwhile, 48% think that the country will remain mired in the same challenges it has faced in the recent past.

“The consumer is right to be cautious,” said RBC Capital Markets Chief U.S. economist Tom Porcelli, in a statement. “The recently enacted tax legislation will certainly provide a boost to spending over the course of the year, but we remain in an environment where job growth is modest, home prices are stagnant at best and access to credit remains limited. The bottom line is the path back to more normal levels of confidence will not be a straight line.”

In fact, the RBC index showed consumer confidence fell in January to 44.9, slightly below last month's 45.2 level, which was the highest point since the recession. But the decline was partially offset by an increase in employment confidence, with the RBC Consumer Outlook Jobs sub-index rising to 52.1 from 51.8 in December and up 10 points from a year ago when it was 42.0.

“After rising for three straight months, confidence has taken a little breather here in January,” said Porcelli. “But even with the modest pullback, we are still seeing a better backdrop of consumer confidence as we start the New Year. The jobs measure bucked the broader trend and posted a surprising rise - even in the face of weaker overall confidence and an unemployment rate that rose in December.”

Another bright spot is that respondents are more optimistic about their local economies. Forty-seven percent of consumers say their local economy is weak, down from 51% last month and 59% in September 2010.

Yet the findings were a mixed bag. The Current Conditions sub-index fell to 35.0, from 35.6 last month. The Expectations sub-index decreased to 55.3, from 56.1 last month. The Investment sub-index slipped to 38.9, from 40.0 last month.

The RBC index polled over 1,007 Americans between December 27 and December 30, 2010.

 

 

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