How Will Consumers Change Their Spending?

In a follow-up to my recent article about how the end of the payroll tax cut might affect consumer spending, research from the New York Fed this week provides numbers we can use. The economy is growing, and it has the potential to improve once we get past the trio of debates in the next couple of months on spending cuts, the debt ceiling and funding the government's operations. Those debates can turn into political paralysis, hurting both the economy and the markets, and represent one risk of what might happen from upcoming legislative actions.

However, one big risk that I see from legislation already passed is how consumers might react to smaller paychecks. Recall that the payroll tax cut basically gave nearly 155 million workers a temporary raise of as much as 2%. That pay cut has now ended, with the payroll tax rate returning to 6.2% from 4.2% for incomes up to $110,100 in 2012. For a worker earning $50,000 a year, that amounts to $1,000 a year, or $84 a month. Economy-wide, it added $112 billion to workers' paychecks in 2011....512 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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