- The Washington Times - Friday, August 31, 2001

Stocks plummeted yesterday despite new evidence that President Bush's tax cuts are giving a powerful boost to disposable income and the economy.
The Dow Jones Industrial Average plunged 171 points, crashing through 10,000 and ending at 9,920 in a downdraft that brought its loss so far this week to 503 points. The Nasdaq Composite Index dropped 52 points to 1,792, for a loss of 6.5 percent so far this week.
The market shrugged off news of a huge 1.7 percent jump in disposable incomes coming out of the July installment of the administration's tax cuts, reported by the Commerce Department yesterday.
The boost to personal income from July's $7 billion of tax rebates and lower tax withholding rates was far greater than expected and bodes well for spending in the months ahead, economists said.
But investors focused instead on evidence in the report that consumers kept their vow to save most of the money, at least for now, pushing the savings rate to a two-year high and holding spending growth to 0.1 percent.
Also weighing on the market was a warning from Sun Microsystems that it will lose money this quarter, despite reporting sunnier prospects only weeks ago.
"The tax rebates are going to be positive for the economy, but right now no one wants to hear that," said Mario Derose, market strategist with Edward Jones. "Everybody's focusing on negative news" because the signs of a turnaround in the economy have not been convincing, he said.
Bearishness is so rampant that Mr. Derose said he expects the major stock indexes in coming days to test the yearly lows they hit in early April. The only thing that will help stocks rally is more definitive news that the economy is on the mend or that companies are becoming profitable again, he said.
Economists found much more to cheer in yesterday's news.
"Anyone who thought the $300-to-$600 tax rebate checks weren't significant should read today's report," said David Orr, chief economist at First Union bank. He said the rebate checks appear to be arriving just in time to rescue consumers and the economy from falling into a deep funk.
The tepid spending gain shows that consumers were not much in the mood to spend before they started receiving their checks at the end of last month. Their first reaction was to save it — more than doubling the savings rate to 2.5 percent from 1 percent.
But experience suggests consumers will cave in to temptations to spend the money in the months ahead, he said, and that should provide the prop for consumer spending that is needed to keep the economy out of recession.
"The tax rebates will help offset the loss of jobs" and incomes in recent months, which is hurting consumers' confidence, he said. Income growth from wages and salaries has fallen by more than half to 3.7 percent since last year and more jobs are being eliminated now than created.
A Labor Department report out yesterday showed that the number of people drawing unemployment checks remains at a nine-year high above 3 million.
"Without the rebates, the outlook would be more sobering," Mr. Orr said.
He added that the fall in energy prices in July also boosted purchasing power, so spending in yesterday's report actually was stronger than it seemed.
Joel Naroff of Naroff Economic Advisers said the tax rebates should be providing investors and consumers with the ray of hope that has been badly needed to weather the worst economic slump in a decade.
"The tax changes made a big difference" because of the surge in disposable income, which is what's left for consumers to spend after paying taxes, he said.
Most of the rebate checks were scheduled to reach consumers in August and September, so yesterday's report suggests that even bigger cash infusions may be reported in the months ahead.
"With households now having some real money in their pockets to spend, it would be surprising if they don't do just that," Mr. Naroff said.
"We should see consumer spending begin to accelerate" next month from the accumulation of tax cuts, said Jerry Jasinowski, president of the National Association of Manufacturers. "Aided by tax rebates, consumer spending will likely keep the economy in the black for the rest of the year."
Srinivas Thiruvadanthai, resident scholar with the Jerome Levy Forecasting Institute, said the problem for the stock market is that spending must pick up much more than expected to prevent profits from falling significantly through the end of the year.
The threat from job losses and the drubbing on stock portfolios will keep consumers in a savings mode for a while, he said.


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