For the middle and lower classes, "any hit to their income will affect their spending patterns," said Greg Daco, an IHS Global economist, adding that consumers could shell out less for groceries, clothing, toys and more. "They are going to, wherever possible, limit their spending to essentials if their budgets are tight."
For industries that rely on spending from blue-collar workers, the hit could not come at a worse time.
In a report last week, Bernstein Research stated that the tax hike will hurt middle-and-upper income consumers the most because low-income households typically derive a share of income from nonwage sources such as government assistance. As such, Bernstein projected that discount retailers, such as dollar stores and Walmart Stores Inc., will be insulated and might even stand to benefit as consumers trade down.
But department, general-merchandise, apparel and home-furnishing stores face higher risks, Bernstein stated, citing marketers such as Target, Best Buy and Williams-Sonoma.
Morgan Stanley took a slightly different view, saying that marketers catering to lower-income households will suffer the most. In a report last month, it projected that the tax hike would decrease "discretionary-spending capability" by 6 percent for people who make less than $40,000, noting that "most households at this level spend all that is available to them."
Todd Hale, Nielsen's senior vice president of Consumer & Shopper Insights, said in the short term, at least, shopping patterns are likely to change. Sales of private-label products—which have been relatively flat—could rise some. Also, consumers, at least for a little while, might use more coupons after cutting back on them last year as the economy rebounded, he said.
The question is how much of the tax-rate hit will be blunted by positive factors, such as the improving unemployment rate, rising housing market and fairly stable gas prices.
David French, senior vice president-government relations of the National Retail Federation, noted that when the tax cut was put in place two years ago, the organization's members did not report much of a boost largely because of higher energy costs, which ate up the new consumer cash.
"Today, ironically, we kind of have a mirror-image situation: As the tax cut has lapsed, energy prices have fallen," he said, adding that the tax hike is "probably going to be somewhat lost in the wash of other economic factors."
Either that, or consumers are about to take marketers to the cleaners.
This report appeared in Advertising Age magazine, a New York City-based sister publication of Tire Business.
