The biggest question going forward is how consumers react to the expiration of a Social Security tax cut. Congress and the White House allowed the temporary tax cut to expire in January, but reached a deal to keep income taxes from rising on most Americans.
The tax increase will lower take home pay this year by about 2 percent. That means a household earning $50,000 a year will have about $1,000 less to spend. A household with two high-paid workers will have up to $4,500 less.
Already, a key measure of consumer confidence plummeted this month after Americans noticed the reduction in their paychecks, the Conference Board reported Tuesday.
And if consumer spending also fizzles, growth could stay low in the January-March quarter. Consumer spending accounts for roughly 70 percent of economic activity.Complicating the outlook are more budget fights in Washington. A set of across-the-board spending cuts are scheduled to take effect March 1 that Congress and the White House would like to replace with more targeted cuts. The nation's borrowing limit will be reached May 1 and will need to be raised so that the government can continue to pay its bills. Uncertainty over how those issues will be resolved could drag on the economy into the summer. But once the budget disputes are resolved, and Americans have adjusted to the expiration of the Social Security tax cut, growth could pick up. Several positive trends are expected to fuel better growth later this year. Construction firms will build more homes to meet steadily increasing demand for houses and apartments. That should create more construction jobs. And home prices are rising steadily. That makes Americans feel wealthier and more likely to spend. Housing could add as much as a percentage point to economic growth this year. Auto sales, meanwhile, reached the highest level in five years in 2012, and are likely to keep growing. That's boosting production and hiring at U.S. automakers and their suppliers.