Posted on: Tuesday, October 2, 2001

Consumer spending rises 0.2 percent

By Jeannine Aversa
Associated Press

WASHINGTON — Consumer spending rose modestly in August as tax-rebate checks put more money in shoppers' pockets.

For the second month in a row, spending increased by 0.2 percent, the Commerce Department said yesterday.

Disposable incomes — the amount left after taxes — jumped for the second straight month, reflecting the impact of tax-rebate checks and lower tax rates, both of which were generated by President Bush's $1.35 trillion, 10-year tax cut.

In August, disposable incomes increased 1.9 percent, the biggest advance since December 1993. In July, disposable incomes grew by 1.7 percent.

Excluding the tax changes, disposable incomes went up by 0.3 percent in both July and August.

The income and spending figures aren't adjusted for inflation.

Before the terrorists attacks on Sept. 11, analysts were hopeful that consumers — whose spending accounts for two-thirds of the nation's economic activity — would be less tightfisted in coming months and continue to keep the economy afloat.

Now most economists believe the economy will fall into recession this year. In the wake of the attacks, consumer confidence has plunged, layoffs have spiked and billions of dollars in business have been lost.

In an effort to stabilize the wobbly economy, the Federal Reserve cut interest rates eight times this year, pushing borrowing costs down to a nine-year low. Many economists predict another cut when policy-makers meet today.

Manufacturers, hardest hit by the ailing economy, foundered in September for the 14th straight month, another report showed in the first snapshot of industrial activity since the attacks.

The National Association of Purchasing Management said its index of business activity fell to 47 from 47.9 in August. An index above 50 signifies growth in manufacturing, while a figure below 50 shows contraction.

Despite low interest rates, the slumping economy made builders more cautious, resulting in the fourth consecutive monthly decline in construction spending nationwide, another government report showed.

Construction activity fell by 1.1 percent in August, the biggest drop in 13 months, led by a pullback in spending on commercial projects, including industrial complexes, office buildings and hotels, the Commerce Department said. In July, total construction activity declined by 0.8 percent.

In the income and spending report, the tax-rebate checks boosted total disposable income at an annualized rate by $81.4 billion in July and $209.4 billion in August, the government said. Lower tax rates added another $13.7 billion, at an annual rate, in both July and August.

The bulk of the checks — up to $300 a person or $600 a couple, representing advance refunds on 2001 income tax — arrived in mailboxes in August and September. The first wave were mailed out on July 20.

If people spend some of the money, economic growth should get a boost, analysts said.

Meanwhile, Americans' personal incomes, which include wages, interest and government benefits, were unchanged in August, after rising by 0.5 percent in July, reflecting the weakened state of the nation's labor market, where unemployment shot up to 4.9 percent in August and payrolls fell. The flat reading marked the weakest showing in income growth since January 1994 when incomes fell by 3.9 percent.

To help jolt the economy in the wake of the attacks, the government has authorized billions in extra dollars for reconstruction and to help the airlines. Congress and the Bush administration are working on a broader plan to stimulate growth.

With disposable income growth outpacing spending, the nation's personal savings rate — savings as a percentage of after-tax income — rose to 4.1 percent in August from 2.5 percent in July. It was the biggest increase the savings rate has seen since January 1999 when it also rose by 4.1 percent.

Even with the rebates, consumers continued to be selective shoppers in August.

Spending on durables — costly manufactured goods expected to last at least three years, such as cars and washing machines — fell by 0.8 percent, on top of a 0.3 percent drop.

Spending on nondurables, such as clothes and foods, rose by 0.2 percent in August, after being flat in July. Spending on services increased by 0.4 percent for the second month in a row.