- The Washington Times - Wednesday, August 1, 2001

Consumers, the mainstay of the weak economy, are in better financial shape and have been saving more than was thought, although confidence is wavering in the face of mounting job losses.
Consumers earned $68 billion more in wages last year than previously reported and their incomes grew by 7 percent to $8.3 trillion, comfortably financing a 4.8 percent increase in spending, the Commerce Department reported yesterday. The strong wage gains have continued this year.
One significant result of the improved financial picture is that the savings rate, or the amount left once taxes and purchases are subtracted from income, is back in positive territory after having appeared to drop below zero for the first time since the Great Depression.
Savings is now calculated at a still-low 1 percent of disposable income, but was a more healthy 4.7 percent as recently as 1998, according to the new figures.
The unusually dramatic revisions help to resolve a puzzle that emerged this year as to why consumers have continued to spend freely in the face of rising job losses. A separate report from the Conference Board yesterday showed that the layoffs have taken a toll on consumer confidence, with its index falling 2 percent in July.
"There is no mystery as to why consumer spending held up as well as it did," keeping the economy from falling into recession in the last quarter, said Jerry Jasinowski, president of the National Association of Manufacturers.
"Consumer balance sheets are better than previously believed, and consumers have more savings to draw on," he said. "The steadiness of consumer spending has kept overall growth positive, even in the face of a nine-month recession in manufacturing."
The revised figures come as a relief to analysts who feared consumers would retrench on spending this year to rebuild their badly depleted savings, possibly plunging the fragile economy into recession.
The report showed that consumers have added a bit to savings this year, with spending growth falling to half last year's rate, or 2.4 percent, in the last quarter.
Economists say today's lower spending pace is still strong enough to keep the economy afloat. And most are hopeful that the federal income-tax rebates that have begun arriving in taxpayers' mailboxes will beef up both the spending and savings rates.
But what's good for consumers has been bad for business, according to the Commerce Department figures. That's because the big jump in wages came from corporate coffers, leaving them with lower profits and showing that the profits recession has been longer and more severe than even the bears on Wall Street believed.
The wage gains resulted in a 7 percent decline in reported profits in 2000. Since companies have been ordering thousands of layoffs largely because of the squeeze on earnings, in the end that could be bad news for consumers as well.
"The profits recession is causing many companies to cut payrolls," said Debbie Johnson of Deutsche Banc Alex. Brown. "The steady flow of job cuts by U.S. corporations suggests consumer spending is vulnerable."
Richard Berner, economist with Morgan Stanley Dean Witter, said the revised figures are "dark" and hold "dire implications" for both workers and businesses.
"Companies are enduring the most intense squeeze on profit margins since 1978-1980," he said. "This squeeze dictates a regimen of corporate cost-cutting that is likely to persist even as recovery unfolds. Labor costs and capital spending both face the ax."
It is precisely because workers' wages are rising so smartly that businesses will look for ways to substitute high-tech machines and gadgets for high-priced labor, he said.
Dean Baker of the Center for Economic Policy Response said the Commerce Department revisions could spell more trouble for the stock market as well, since profits have fallen so much in the last year. Stock prices do not yet reflect the significantly lower earnings shown in the report, he said.

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