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The Honolulu Advertiser
Posted on: Saturday, August 30, 2003

Tax cuts boost July consumer spending

By Jeannine Aversa
Associated Press

WASHINGTON — America's consumers, aided by tax cuts that left them with extra cash, ratcheted up their spending in July by the largest amount in four months, a strong signal the economy is gaining momentum.

The Commerce Department reported yesterday that consumer spending increased by 0.8 percent in July, on top of a brisk 0.6 percent rise the month before.

"Households spent money like crazy in July and they bought everything that moved or didn't," said Joel Naroff, president of Naroff Economic Advisors.

Consumers' behavior is a major factor shaping the economy's recovery because their spending accounts for roughly two-thirds of all economic activity in the country.

Their hearty appetite to spend in July along with economists' expectations for solid spending increases in August reinforced the belief that the economy will stage a material rebound in the second half of this year.

Yesterday's report made economists even more bullish about the economy's growth prospects in the current quarter. Some estimated that the economy in the July-September quarter could grow at close to a 6 percent annual rate, nearly double the 3.1 percent pace seen in the second quarter.

Economists said President Bush's third tax cut, which lowered federal tax withholdings, boosted peoples' take-home pay and provided some Americans with child tax-credit checks, was a factor in the increase in consumer spending in July.

"When more money is placed in the hands of consumers, they will spend more," said Richard Yamarone, economist with Argus Research Corp.

Americans' disposable incomes, or what's left after taxes, jumped by 1.5 percent in July, the largest increase since January 2002, and up sharply from a 0.4 percent gain in June. The government attributed much of July's increase to the president's tax cut.

Excluding the tax impact, disposable incomes increased by a more modest 0.2 percent in July, the government said.