NEW YORK ( TheStreet) -- The Commerce Department reported consumer spending advanced 0.2% in March -- much weaker than the 0.3% and 0.7% registered in January and February.
Extraordinary year-end bonuses and dividends -- intended to dodge higher taxes in January -- boosted consumer activity in January and February but now households are hunkering down. Much weaker consumer spending is expected for the second quarter as the $120 billion January hike in payroll taxes and $45 billion increase in income taxes borne by the wealthy weakens household finances.
In January, when a last minute tax deal raised social security taxes, working- and middle-class families could not adjust spending immediately -- they have to keep driving to work and feeding their children -- but in March retail sales fell precipitously. Now forecasters expect traffic at shopping malls to recover only slowly.
Many upper income families pay taxes on a quarterly basis, and the actual impact of the quite complex changes to the tax code and rates implemented in January were not reckoned until their accountants computed their first quarter payments due April 15 -- now they are trimming purchases even further.
Also, the January tax changes greatly reduced mortgage interest deductions for high income families, and this will weaken demand for new and existing homes. The pace of sales may not be much affected but the price increases are likely to slow, especially outside of hot markets like Florida and New York, where speculators and foreign investors seeking refuge from uncertainty in Europe and China have been pouring money. Overall real estate inflation will not support real asset growth and rising consumer spending the balance of 2013 as it did last year.
Along with sequestration, higher taxes are subtracting more than $200 billion from household purchasing power and government spending -- that is slowing demand for what Americans make and makes jobs tougher to find.