- The Washington Times - Tuesday, August 2, 2005

Consumers shrugged off record-high gasoline prices and went on a spending spree this summer, splurging especially on new cars, reports showed yesterday.

Spending and income were both up strongly in June, while July auto sales soared by 25 percent and appeared close to a new monthly record. Deep discounts by Detroit manufacturers prompted the consumer outpouring.

The latest signs of economic strength, which include a powerful revival in manufacturing, lifted the Nasdaq stock index to 2,218, its highest close since June 2001.

The Standard & Poor’s 500 Index rose to a new four-year high of 1,244, while the Russell 2000 — which houses small company stocks — soared to a record high.

“We’re finally starting to see the markets wake up to the fact that the economy is in pretty good shape,” said John Caldwell, chief investment strategist for McDonald Financial Group.

Consumers responded enthusiastically to promotions started by General Motors in June, offering cars and sport utility vehicles at the prices paid by its employees.

The overwhelming response — a 46 percent leap in sales — prompted GM to extend the program yesterday through Labor Day, with Ford and DaimlerChrysler following suit.

The June spike in auto sales contributed to a robust 0.8 percent increase in consumer spending that month after a flat showing in May, the Commerce Department reported. Consumers nearly outspent their growing incomes and drove the savings rate to zero — close to a record low.

GM’s success prompted Ford and DaimlerChrysler to adopt similar promotions during July, with dramatic results. Ford reported a 29 percent jump in sales, while Chrysler racked up a 25 percent gain. GM’s continuing promotion boosted its sales by 15 percent.

Even Asian automakers like Toyota, Nissan, Honda and Hyundai — which did not offer the discounts — experienced double-digit sales gains. A “rising tide of bargains lifted the market,” said Jim Press, president of Toyota’s U.S. sales unit.

The auto companies said their biggest gains were in sales of gas-guzzling SUVs and pickup trucks, despite the steady rise in gas prices at the pump to a record $2.33 on average in July.

Thorsten Fischer, analyst with Economy.com, said consumers seem impervious to high gas prices, in part because the price is not that high, after adjustment for inflation.

Spending on gasoline and heating oil together accounted for a little less than 3 percent of personal income in the first quarter, well below the peak of more than 5 percent set in 1982, he said.

“Consumers have vigorously supported the broader economy despite the recent run-up in energy prices,” he said. “The reason is that the robust economic expansion — including strong income growth, solid job creation and rapid house-price appreciation — has more than offset the adverse effects of higher gasoline prices.”

John H. Makin, a visiting scholar at American Enterprise Institute, said the wealth and consumer financial cushion generated by the housing boom has largely offset the drag from high energy prices, but that may not last for much longer.

“The U.S. economy has held up nicely, despite the growing oil drag, because of the growing tailwind from the robust real-estate sector,” he said, estimating that the rapid rise in home prices added $300 billion to consumer wealth during the first quarter alone.

Consumers have been able to easily extract some of their home-equity gains so they can spend at the malls and auto dealerships, using home-equity loans and cash-out refinancings.

“As if to underscore their insouciance over energy costs,” Mr. Makin said, consumers have accelerated purchases of light trucks that get as little as 12 miles to a gallon.

But he said the spending spree is based on “tenuous” gains in house prices, which are likely to slow sharply or even reverse as the Federal Reserve raises interest rates in coming months.

Growing housing wealth has made consumers “too comfortable with higher oil prices,” he said, but the reality will come home when the housing market cools and causes growth in the larger economy to falter.

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