After-tax incomes show big gains
WASHINGTON (AP) - June 27, 2008 The payments helped boost consumer spending by the largest
amount in six months.
The Commerce Department reported that disposable incomes, the
amount left after paying taxes, surged by 5.7 percent last month.
It was the biggest increase since May 1975, reflecting $48.1
billion in rebate payments made last month. The surge in incomes
helped boost consumer spending by 0.8 percent, the biggest gain
since last November.
The administration is hoping that the $106.7 billion in stimulus
payments being made this year to 130 million households will be
enough to offset serious drags on the economy at the moment from a
prolonged housing slump, a severe credit crisis and soaring energy
bills.
However, economists are worried that the boost from the stimulus
checks will be only temporary and once the checks are spent, the
risks of the economy falling into a deep recession will increase.
A separate survey of consumer confidence released Friday gave
support to those concerns. The University of Michigan Index of
Consumer Sentiment dropped 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 with the Dow Jones industrial average plunging by
nearly 360 points on Thursday to the lowest level in almost two
years. Investors were concerned over the impact soaring energy
prices and a slumping financial sector will have on future growth.
Oil prices continued to trade on Friday above the $140 per barrel
mark.
The rebate checks are part of a $168 billion package of tax
relief for individuals and businesses that Congress passed in
February at the urging of the administration in an effort to give
the economy a boost and ward off the threat of a deep recession.
The payments began on April 28 and are scheduled to be completed by
mid-July.
The Bush administration currently is resisting Democratic calls
for a second stimulus package even though economists are worried
that the effects of the boost will prove temporary at best. They
fear the stimulus will fail to prevent a serious slump in the
second half of this year as the economy's troubles from housing, a
severe credit sqeeze and soaring energy prices mount.
For May, overall incomes rose by 1.9 percent after a 0.3 percent
rise in April. Part of that increase reflected the portion of the
stimulus payments that are going to low-income individuals. But the
bigger impact showed up in after-tax incomes, which shot up by 5.7
percent in May after a 0.4 percent rise in the month before,
reflecting the bulk of the stimulus payments, which represent a tax
break for most households.
The hope is that the stimulus payments will do the trick to
bolster consumer spending, which accounts for two-thirds of total
economic output.
For May, consumer spending jumped by 0.8 percent, double the 0.4
percent gain in April. Excluding the effect of rising gasoline and
other price increases, inflation-adjusted spending rose by 0.4
percent in May, the biggest one-month increase since last August.
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.