- The Washington Times - Friday, August 29, 2003

Tax cuts poured fuel on the economic fire last month, driving up disposable incomes by 1.5 percent and prompting consumers to go on a shopping spree.

Shoppers increased purchases by 0.8 percent on everything from cars and clothing to vacations and trips to the beauty salon in an acceleration from this spring’s pace of spending, the Commerce Department reported.

The jump in disposable incomes reflected tax-rebate checks totaling $100 billion at an annualized rate that were sent to families with children in mid-July. It was the largest such increase in incomes since January 2002, when most of President Bush’s 2001 tax cuts went into effect.

“Tax cuts and child checks are beginning to really kick in. … This is adding dramatically to disposable income,” said Joel Naroff, president of Naroff Economic Advisers. He noted that a more modest 0.2 percent growth in incomes reported by the department, before taxes, was not large enough to have supported last month’s big increase in spending.

Since consumers are still inclined to spend nearly every penny they earn, despite some worries about jobs, “households spent money like crazy in July and they bought everything that moved or didn’t,” Mr. Naroff said. Spending accelerated from a 0.6 percent increase in June and an overall 3.8 percent pace during the spring quarter.

Even if consumers didn’t increase spending for the rest of the summer, their July spending binge already has vaulted spending growth — which constitutes two-thirds of economic growth — above 4 percent for the summer quarter, Mr. Naroff said.

“We are setting up for a really strong third quarter,” he said. “The consumer has played the role of Atlas, but that may not be needed as much going forward.”

Businesses are starting to join in the spending party and manufacturers are beginning to contribute to the economy after a long pause. A report on manufacturing in the Chicago region yesterday showed the highest level of activity in 15 months.

Most economists expect the consumer spending spree that started this spring to continue for months because taxpayers managed to sock away a portion of their tax rebates, and they will continue to benefit from higher take-home pay as the rest of the $350 billion of tax cuts is phased in.

The spending surge cannot continue indefinitely, however, without a resumption of job growth, economists caution. The hope is that the jump-start the economy is getting from tax cuts this summer will spur businesses to start adding jobs in the fall. Some economists are forecasting a small increase in jobs in the employment report expected from the Labor Department next Friday.

Ever since the arrival of tax rebates, Wal-Mart and other retailers and businesses that cater to consumers have been ratcheting up their growth forecasts for the year. About half of the rebate checks were saved and about half were spent during July, said Lynn Reaser, chief economist with Banc of America Capital Management.

The part saved was reflected in the personal savings rate, which jumped to 3.8 percent of disposable income in July from 3.1 percent in June.

While consumer confidence has flattened lately — reflecting wariness about the job market — consumers overall are much more upbeat than at the beginning of the year and will remain predisposed to spending their incomes, Ms. Reaser said.

“Job concerns are impacting confidence, but not spending,” said Ed Yardeni, chief investment strategist at Prudential Securities.

“Consumers are likely to remain important contributors to economic growth. They have plenty of cash to spend if they choose to do so,” he said.

Consumers stowed away not only part of their tax rebates to spend at a later date, he said, but they also previously stashed away nearly a half a year’s income into bank and brokerage accounts during a historic wave of cash-out mortgage refinancings.

“Consumers are in good shape. They currently have a record $3.2 trillion parked in savings deposits and another $900 billion in retail money market mutual funds,” Mr. Yardeni said, predicting that money eventually will be spent to the benefit of businesses and investors in consumer industries from department stores to food and furniture dealers.

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