Americans Go On Spending Binge

Pete Rivera of Schenectady, N.Y., takes a break from shopping in the Rotterdam Square Mall Monday
Consumers shopped with gusto in July, boosting their spending by 0.8 percent as President Bush's third tax cut left people with some extra cash in their wallets and pockets.

The increase in spending in July was the largest since March and followed a sizable 0.6 percent advance posted in June, the Commerce Department reported Friday. July's spending figure matched economists' expectations.

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, which lowered federal tax withholdings, boosting people's take-home pay, and provided other incentives. Excluding the tax impact, disposable incomes increased by a more modest 0.2 percent in July, the government said.

In other economic developments:

  • The stock market yawned at a speech on monetary policy delivered by Federal Reserve honcho Alan Greenspan. The central bank chief didn't mention the current state of the economy or the future course of interest-rate policy in his remarks. He did defend the Fed's concern about the possibility of deflation, which have rattled financial markets and confused some Wall Street investors. Although the chance of deflation is remote, Greenspan said policy-makers nevertheless must be on guard because of its potential to do serious damage to the economy.
  • The Purchasing Management Association of Chicago said its index of area business activity rose to 58.9 in August on a seasonally adjusted basis from 55.9 in July. It was the fourth straight month that the business barometer signaled expansion.
  • The University of Michigan's report on consumer confidence indicated a slight drop in August from July.

    The latest figures on spending provided fresh evidence that consumers are continuing to do their part to keep the economy going.

    Consumer spending accounts for roughly two-thirds of all economic activity in the United States. Because of that, the behavior of shoppers is a major factor in shaping the economy's recovery.

    Consumers increased spending in July on big-ticket "durable" goods such as cars and appliances by 2.1 percent, up from a 1 percent gain in June.

    For nondurables, such as food and clothes, consumer spending rose by 0.8 percent in July for the second month in a row. Consumer spending on services rose 0.5 percent, up from a 0.4 percent increase in June.

    Because disposable income growth outpaced spending, the nation's personal savings rate, or savings as a percentage of after-tax incomes, rose to 3.8 percent in July from 3.1 percent in June.

    With signs that the economy is rebounding, the Federal Reserve earlier this month left a key short-term interest rate at a 45-year low of 1 percent and signaled that the rate could stay there for some time.

    Recent economic reports suggest that manufacturing is healing and businesses are boosting investment, although they are still reluctant to beef up their work forces.

    Low short-term interest rates along with fatter paychecks and other incentives from the president's tax cut should motivate consumers and businesses to spend and invest more, thus lifting economic growth, economists said.

    Some economists believe growth in the final six months of this year will clock in at a rate in the range of around 3.5 percent to just more than 4 percent. Others think it will be closer to a 5 percent pace. Either scenario would be better than the 2.3 percent growth rate seen in the first six months.