Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Middle-Class Caution Is Bad for Business

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

This week brought along with it a slew of warnings and revisions from retailers who are starting to see the writing on the wall. Consumers are spending less than anticipated, and it looks as if the end of the year is going to bring more soft spending with it. Macy's (NYSE: M  ) , Nordstrom (NYSE: JWN  ) , and Wal-Mart (NYSE: WMT  ) all dropped their forecasts for the back of the year. The question is -- why?

Wal-Mart CEO Bill Simon blamed some of it on the expiration of the payroll tax. Macy's CFO thought consumers were reprioritizing and spending on cars and homes instead of on retail goods. Nordstrom decided not to be nailed down and took the high road, saying that its "job is to stay focused and execute on what's given [to it]." 

Payroll taxes take their bite
The specter of lower spending from the expiration of the 2% payroll tax holiday has lingered in the air for months now. Wal-Mart has cited the payroll tax in the past three earnings statements it's released, claiming that its customers have been suffering under the new weight. Target (NYSE: TGT  ) made a similar claim after its January sales came in low and claimed that the effects were felt throughout the first quarter.

At issue is the payroll tax holiday that expired at the beginning of 2013. The rate had been dropped to 4.2% from its normal 6.2% in a round of negotiations in 2010. During the political and social nightmare that was the end of 2012, the U.S. Congress let the holiday lapse. That meant an extra tax burden in the New Year, with estimates putting the annual impact at around $1,000 per average working household.

The reason some companies have cited the impact while others have looked for alternative explanations is largely due to demographics. The 2013 cost is around $20 a week, which means that households with strong earnings probably didn't notice the change. The holiday also affected only the first $106,800  of income, meaning that high earners got a smaller proportional benefit.

As a result of all that, companies that focus on price and target lower- to middle-income consumers are the ones feeling the bulk of the squeeze. Nordstrom is more concerned about cars and homes because its customers were much less likely to have felt the impact of the change. Wal-Mart and Target, on the other hand, may have been hit squarely in their wallets.

How the upper half spends
There's not an end in sight to that issue, and so Wal-Mart and Target may continue to see pressure throughout the year. The higher-end retailers, like Nordstrom, are probably suffering from the issues that Macy's highlighted. Consumers have been buying in waves, and as house prices have started to recover, more consumers are spending their cash on homes. That means purchases of clothes and other goods are going back on the waiting list.

That balancing act can only explain so much, though. Consumers with lots of cash and no plans to relocate should be doing well. After all, they're not in a position where they need to make choices about spending. Borrowing costs are low, and tax issues are less meaningful to them. While a study by Target found that about 75% of shoppers were aware of the payroll tax, and most were altering their shopping because of it, the same isn't true at the top.

Research earlier this year found that a majority of high earners -- incomes in excess of $500,000 -- wouldn't change their spending patterns based on tax increase. That's good news for companies at the highest end of the consumer spectrum, including handbag designers and jewelry makers.

Cautious spending is the new normal
There is an oddly phrased quote from a Wells Fargo analyst claiming that consumers won't be "spending with abandon" until there is a meaningful increase in wages. I'm not sure anyone really wants that brand of spending, but all signs do point to a much more cautious consumer for the foreseeable future.

Research from MasterCard Advisors claimed that consumers are going to keep putting off their wants to fulfill their needs. The real message is that consumers are still in a position where they have to choose between wants and needs. Wages are forecast to climb around 3% on average this year, which is only one percentage point ahead of inflation.

Consumers are going to be holding on to more of their cash, and spending it on very select items. That's going to mean bad news for retailers at most points along the economic spectrum. While the higher end may dodge some of the suffering, even they will lose out on the aspirational purchases that a healthy middle class often makes. Until wages start to increase their pace or consumers learn to adjust to the change in payroll tax, it's going to be tough times ahead for retailers.

To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Read/Post Comments (4) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 17, 2013, at 4:23 PM, willekarman7 wrote:


  • Report this Comment On August 17, 2013, at 7:37 PM, BirdWhiperer wrote:

    Well, you go shopping, and you see the same one size fits all styles, and nothing but "made in china" on all tags! Everything is all the same, and it gets boring after a while.

  • Report this Comment On August 17, 2013, at 8:18 PM, neamakri wrote:

    I am ignorant about any change in payroll tax. However you never said that my annual income tax decreased, so how does that put more money into my pocket? It does not.

    Only foolish people will think they have more money to spend and so go into debt. To paraphrase a movie line: "I see foolish people."

    Congress contains more asses than the Bureau of Land Management.

  • Report this Comment On August 17, 2013, at 9:50 PM, erini wrote:

    Corporations took all the money, now they will go down together with an abused middle class. Those guys don't know that all of us are connected. If the screw the middle class they will have nobody to sell their products to..... and going global has the same limitations.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2599369, ~/Articles/ArticleHandler.aspx, 9/29/2016 5:03:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,143.45 -195.79 -1.07%
S&P 500 2,151.13 -20.24 -0.93%
NASD 5,269.15 -49.39 -0.93%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/29/2016 4:02 PM
JWN $51.48 Down -0.30 -0.58%
Nordstrom CAPS Rating: ****
M $36.05 Down -0.05 -0.14%
Macy's CAPS Rating: **
TGT $67.72 Down -0.10 -0.15%
Target CAPS Rating: ***
WMT $70.73 Down -1.06 -1.48%
Wal-Mart Stores CAPS Rating: ***