- The Washington Times - Saturday, August 31, 2002

The resilience of American consumers, despite some recent erosion of incomes and growing doubts about the economy, is keeping the economic recovery alive, economists say.

Reports out yesterday showed that consumer spending increased by 1 percent last month even though incomes were flat and confidence declined.

Consumers' appetite for new cars and sport utility vehicles, whetted by another round of free-financing offers, also prompted a rebound in Midwest auto manufacturing, relieving worries that a renewed industrial recession might drag down the rest of the economy.

"Consumer spending is accelerating this summer, belying forecasts of a double-dip recession," said Debbie Johnson, economist with Prudential Securities.

Since consumer spending comprises two-thirds of economic activity, the renewed exuberance puts economic growth on a solid track of around 3.5 percent for the summer quarter, economists said.

And while incomes were weak last month, with wages taking a rare dip of 0.2 percent as employers cut back on hours, disposable income kept growing thanks to a decline in inflation and lower taxes, Miss Johnson noted.

A measure of consumer sentiment published by the University of Michigan also declined in the past two months, reflecting the erosion of incomes, a shortage of new jobs and the pummeling taken by the stock market this summer.

But Miss Johnson noted that even the sentiment report contained a silver lining, as near-record numbers of consumers said that extraordinarily low interest rates have made the conditions for buying homes and cars close to ideal.

Spending on cars and other big-ticket items rose by a robust 3.7 percent last month, according to the Commerce Department. But purchases of services and other items also increased by a solid 0.6 percent.

Doomsayers contend that consumers will soon curb their spending because of the absence of jobs and income growth and growing debt burdens. But Miss Johnson noted that consumers seem to have plenty of money on hand, having poured $71 billion into savings accounts just in the past month.

The amount of money parked in money-market deposits and other savings accounts is at a record level near $6 trillion, she said, giving consumers more than enough wherewithal not only to prevent a double-dip recession but also to fuel a rally in the beleaguered stock market.

Consumers have been increasingly diverting their funds from stocks into bonds and savings accounts. During July's stock market debacle, withdrawals from stock mutual funds hit a record of $53 billion, the Investment Company Institute reported yesterday.

"Look at what consumers do and not what they say," said Joel Naroff of Naroff Economic Advisers. "Month after month, the consumer spends tons of money people seem to want to buy everything," despite confidence readings approaching the lows hit after the September 11 terrorist attacks.

The unusual drop in wages in July did raise a "red flag," since consumers in the end can only spend as much as they earn, he said, but noted income had surged strongly the previous two months.

"The weakness in wages and salary growth is the number one problem for the economy going forward and will limit future spending gains," said Mark Vitner, senior economist with Wachovia Securities.

"Thank goodness for tax cuts and lower inflation," he said. Personal tax payments dropped 0.8 percent last month and are down 13.6 percent in the last year mostly as a result of President Bush's tax-rate reductions.

"Without tax cuts, consumers would have been in far worse shape during the recession and retailers would be struggling even more than has been widely reported," Mr. Vitner said.

Richard Berner, chief economist at Morgan Stanley, said worries about a sudden setback in the economy have eased recently, but consumers still appear hesitant to buy anything outside of housing and autos because of concerns about jobs and the economy.

Their reluctance to spend on discretionary items, in turn, has made businesses cautious about spending and hiring, in what seems to be a self-reinforcing cycle, he said.

The result has been a sluggish pace of growth that leaves the economy vulnerable to shocks, which could come from any of several quarters, he said.

Among the developments that could send the economy plummeting again, according to Mr. Berner, are sharply higher energy costs, uncertainty caused by the threat of war in the Middle East, and "aftershocks" from the corporate-governance crisis.

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