After a weak holiday season, shoppers returned to stores….

After a weak holiday season, shoppers returned to stores in January to take advantage of steep discounts. With the “fiscal cliff” averted, a rebounding housing market, and a stream of positive economic data that pushed the S&P 500 to a five-year high, consumers were more willing to open their wallets last month. According to a Thomson Reuters survey of 18 retailers, sales for stores open at least one year grew 5.8% in January, handily exceeding forecasts for 3.5% growth. Mid- and high-end department stores fared the best. Notably, Macy’s, the nation’s second largest department store, reported a 12% jump in year-over-year sales-the best monthly gain since April 2011. Macy’s benefited from a fresh selection of merchandise aimed at the post-holiday shopper. Kohl’s, a value-oriented department store, also reported solid results, with sales up 13%, compared to analysts’ projections for a 3% increase. After sluggish sales during the final months of 2012, Kohl’s steeper-than-normal markdowns in January probably lured back shoppers, which helped lift sales at the cash register, but perhaps at the expense of profitability.

Although January was generally a healthy month for retailers, there are some headwinds going forward. Many consumers are beginning to notice a decline in their take-home pay, which is the result of the 2% increase in payroll taxes that kicked in at the start of the year. For an individual earning $50,000 per year, the 2% increase translates into about $1,000, or $20 per week. Some retailers are beginning to recognize the potential impact. Discount retailer Target, which reported a 3.1% rise in January sales, warned last week the additional payroll tax may hurt future results. In our view, the higher payroll tax won’t derail the nation’s economic recovery, but it may limit some of the upside.