Payroll Tax Hike: Killer Whale or Red Herring?

By Daniel Wagner, AP Business Writer

WASHINGTON -- Companies are rushing to describe the impact of higher Social Security taxes that took effect in January. They paint a bleak picture.

Cash-strapped shoppers are spending less, many U.S. firms warned in earnings announcements over the past few weeks. They are avoiding small luxuries like restaurant meals and fashion items. And they're reconsidering major new purchases. Wherever people chose to cut back, those companies would feel the pinch.

In the past, companies have blamed flu epidemics, earthquakes and SARS for poor results. The trouble, experts and analysts say, is that these high-profile events are only part of the story -- sometimes barely a sliver.

The latest culprit is a 2% increase in the Social Security payroll tax, which all U.S. wage earners pay. The rate was reduced temporarily as a measure to boost the economy out of recession, but that "holiday" ended on Dec. 31. As a result, households earning $50,000 will have about $1,000 less to spend this year. A household with two high-paid workers will have up to $4,500 less.

"Any time something like this happens -- whether Hurricane Sandy or the tsunami or the payroll tax hike or uncertainty in Washington -- any company that didn't perform as well as they would have liked gets to say, 'Look, these idiots in Washington are screwing it up for us,'" says Dan Greenhaus, chief global strategist at BTIG, a brokerage firm.

Greenhaus says he is not surprised by the number of companies grousing about payroll taxes. A catchy news hook can help companies "blame a macrotrend for what may be a micro story" about their individual strengths and weaknesses, he says.

There's little doubt that the drop in take-home pay will drag on economic growth. Government economists estimate it will lower economic output 0.6% this year.

Yet the tax talk ignores a host of trends, outside events and company-specific factors, analysts say. They say investors should pay closer attention to these factors when considering how a company might perform this year.

Take Darden Restaurants ( DRI), operator of chains like Olive Garden and Red Lobster. Like other casual sit-down restaurant companies, Darden faces tough competition from chains like Chipotle Mexican Grill ( CMG) and Panera Bread ( PNRA), whose food and prices fall somewhere between fast-food and sit-down fare. Darden's shares slid 28% between their recent peak in September and Feb. 21, the day before it lowered its earnings forecast.

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