Dunn County consumers’ pain worsens with payroll tax hike, gas costs

It’s getting tougher again at the bottom of the food chain.

Gas prices in Dunn County rose to $3.69, for super unleaded, and $3.74, for unleaded over the course of a few weeks. (Photo by BRYCE MARTIN/Herald)
Gas prices in Dunn County rose to $3.69, for super unleaded, and $3.74, for unleaded over the course of a few weeks. (Photo by BRYCE MARTIN/Herald)

By BRYCE MARTIN

Herald Editor

Posted March 1, 2013

It’s getting tougher again at the bottom of the food chain.

Rising taxes and soaring gasoline prices have combined to slash spending power at the lower end of the economy, according to executives from fast food chains, discount retailers and other companies that cater to budget-conscious consumers.

The price for a gallon of unleaded gasoline in Dunn County stood firm around $3.00 at the beginning of the year. It is now up to around $3.75, a raise that is pinching the pockets of both residents and commercial services.

Diesel prices are up about 20 cents from a year ago in the county.

“It’s hurting, but isn’t something too new,” said Walter Gregson, a semi-truck driver from Idaho who stopped to fill up his trailer at the Cenex C-Store in Killdeer. “Hopefully it’ll go back down soon.”

Gregson said he fills up his rig from a quarter tank, which has a full capacity of about 200 gallons, for around $750 to $800.

And it’s not just the price of gasoline that is making things tougher, especially in an area where normal costs for everyday goods and services is higher than average because of the oil boom effects.

The people with the least flexibility in their budgets are suffering the most from a series of blows: the Jan. 1 expiration of a 2 percent cut in payroll taxes, a delay in income tax refund payments, and a the increase in gasoline prices this year through last week.

While economists said this is unlikely to derail economic growth this year – given the limited spending power of the poor – Rodkin and other executives at the Consumer Analyst Group of New York conference in Florida this week said there were clear signs of softness at the low end of their business.

Kraft Foods Group, which has an operations center in Fargo, warned last week that fourth-quarter revenue would fall almost 11 percent after it failed to tailor its prices to meet demand at the lower end of the market, particularly in its packaged lunch meat business.

Wal-Mart shares closed down 2.1 percent on Friday after Bloomberg reported that the world’s largest retailer suffered its worst sales start to any month in seven years in February, due to increased payroll taxes and delayed tax returns. Wal-Mart has not confirmed the veracity of those figures.

Tax refunds are a big source of spending for consumers who could not afford bigger-ticket items during the holiday shopping season.

SCRAMBLING FOR VALUE

University of Michigan data underlines the trend – consumer sentiment for lower-income individuals fell for a third straight month in January to its lowest level since Nov. 2011.

“This is going to be more important for those companies whose core market is this group of people than it’s going to mean for the overall economy as a whole,” said Steve Blitz, chief economist at ITG Investment Research in New York.

“It will slow things a little bit and these things have a way of multiplying through,” said Blitz, who added it could ultimately affect consumer confidence and housing sales.

On Feb. 7, Cato Corp, the operator of a chain of low-price apparel stores, blamed the tax issues for a 12 percent drop in same-store sales and said sales dropped off more intensively as January wore on.

“Sales at the end of the month were significantly worse than trend. We think this was primarily due to the timing of tax refunds and the effect of higher payroll taxes. We are unclear what portion of the sales lost due to tax refund delays will be recouped,” CEO John Cato said in a statement.

There is also evidence of cutbacks among the affluent – not necessarily the ultra-high net worth individuals whose fortunes are more immune to economic swings, but for those making a few hundred thousand dollars a year, who felt the biggest bite of a tax rate hike that took effect at the start of the year.

LOW POINT IN FEBRUARY

Last week, the government said U.S. retail sales rose only 0.1 percent in January. Consumer spending accounts for about 70 percent of the U.S. economy, magnifying the impact of the recent weakness.

“Overall, the lower-end consumer, primarily the dollar-store and discount-store customers are most impacted by the payroll tax change and not only is that now showing up, but we expect that to continue to hurt sales going forward,” Credit Suisse’s retail analyst team said in a research note on Tuesday.

“In a little bit of piling on, the delay in (tax) refunds is adding some near-term pressure and while that will mitigate by April, the payroll tax issue is here to stay.”

Some consumer-facing chief executives say that things have not really slowed for budget shoppers as such – they never fully recovered from the financial crisis in the first place.

From the perspective of Graham Mackay, CEO of SABMiller, the low-end beer consumer started going away some time ago and never really came back.

“There’s been a lot of dire stuff floating around about January. You know, I’m not so sure you can draw too many conclusions from one month,” said Mackay.

“The top end has continued to grow. It’s never stopped growing,” he added.

To be sure, the blow to consumer spending from gas prices, the payroll tax hike and the delay in refunds will likely be softened in part by an improving labor market and steadily rising home values.

“Consumer spending in February may very (well) be the weakest month, given the gasoline price increase, thereafter it looks like everything will be cushioned by savings,” said Harm Bandholz, chief economist at UniCredit Research in New York.

“It will increase at a lower rate given the tax cut expiration, but beyond that looks good. I am pinning that on the underlying improvement of the labor market.”

(DROVERS / CATTLE NETWORK contributed to this report.) Contact Bryce Martin at bmartin@countrymedia.net.


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