Incomes and Spending May 2008

After-tax incomes and spending show big gains

Jun 27 03:42 PM US/Eastern
By MARTIN CRUTSINGERAP Economics Writer

WASHINGTON (AP) - Millions of economic stimulus payments sent after-tax incomes surging in May by the largest amount since a similar recession-fighting effort by Gerald Ford 33 years ago.

All the extra money helped to push consumer spending up by the largest amount in six months, but economists warned the boost would likely prove short-lived given all the other problems facing consumers at present.

The Commerce Department reported Friday that after-tax disposable incomes jumped by 5.7 percent in May, the biggest one-month gain since a 6.3 percent increase in May 1975 when Ford was president. He was fighting a recession that year with a program to mail individual taxpayers $50 checks.

This time around individual payments range from $300 to $600 with couples getting up to $1,200. In all, $48.1 billion in rebate payments were made in May and through this week, the government announced Friday, payments total $78.3 billion—three-fourths of the $106.7 billion scheduled to be paid to 130 million households. The payments are to be completed by mid-July.

Bolstered by the big 5.7 percent surge in after-tax incomes, consumer spending rose by 0.8 percent last month, the best showing since November. Even after removing the effects of higher gasoline and other products, inflation-adjusted spending rose by a solid 0.4 percent, the best performance since last August.

Since consumer spending accounts for two-thirds of total economic activity, analysts said the big jump in May should guarantee a positive reading for overall economic output in the current April-June quarter of around 1.25 percent to 1.5 percent, up from 1 percent growth in the January-March quarter.

Growth at that level is also expected in the third quarter, but analysts said that the fourth quarter of this year and first quarter of next year could well sag and even turn negative as the effects of the stimulus payments wear off.

"The stimulus payments are likely to be a temporary boost and come the fall, consumers will be wondering how they are going to pay their bills with gasoline at $4-plus, unemployment rising and housing values and stock prices falling," said Mark Zandi, chief economist at Moody's Economy.com.

"The worry is that after the stimulus relief fades away, the consumer will still be faced with the same underlying problems," said Nigel Gault, chief U.S. economist at Global Insight.

David Wyss, chief economist at Standard & Poor's, said he was concerned that the stimulu
s checks will prove to be for the economy what eating candy is for children, a "sugar high" that won't last.

"Maybe we will be lucky and oil prices will drop back down by the time the boost from the stimulus program wears off and that will provide enough momentum to keep the economy going," said Wyss. He said his concern was a double-dip recession with the weakness earlier this year followed by a brief boost from the stimulus checks followed by even weaker activity in late 2008 and early 2009.

In other economic news, the University of Michigan Index of Consumer Sentiment fell to 56.4 in June, the lowest reading in 28 years and a stark reflection of all the problems facing the economy at the moment.

"Surging gas prices, high food prices, disappearing jobs, declining home values and record foreclosures were cited by consumers as the basis for their pessimism and most consumers expected each of these problems to continue to worsen in the months ahead," said Richard Curtin, director of the survey.

Worries about the economy showed up in turbulent financial markets this week as investors worried about what surging oil prices and a continuing credit crunch would do to stocks in the months ahead.

For May, overall incomes rose by 1.9 percent after a 0.3 percent rise in April. While part of that increase reflects the portion of the stimulus payments that are going to low-income individuals, the bigger boost showed up in after-tax incomes, reflecting the impact of the tax relief portion of the stimulus payments.

A closely watched inflation gauge tied to consumer spending was up 0.4 percent in May but excluding energy and food, the increase was a much smaller 0.1 percent. Over the past 12 months, core inflation excluding food and energy is up 2.1 percent, just above the Federal Reserve's comfort zone.

The Fed earlier this week brought an end to an aggressive string of interest rate cuts designed to protect the economy from toppling into a deep recession, citing increased worries about inflation pressures coming from surging energy prices.

The big increase in after-tax incomes based on the surge in stimulus payments pushed the personal savings rate to 5 percent, the highest level since May 1995. Personal savings represent the amount of after-tax income consumers have left after deducting their spending for the month.




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