Originally created 09/30/03

Consumer spending increases by strong 0.8 percent



WASHINGTON -- America's consumers - flush with tax cuts that left them with extra cash in their wallets - ratcheted up their spending by a strong 0.8 percent in August, helping to power an economic resurgence.

The advance in spending reported by the Commerce Department on Monday came on top of an even bigger 0.9 percent increase in July as larger paychecks and other incentives from President Bush's third tax cut began to take hold.

The August spending figure was in line with economists' expectations.

Meanwhile, Americans' disposable incomes, or what's left after taxes, advanced by 0.9 percent in August, following a 1.5 percent jump in July.

The government attributed much of the increase in disposable incomes in both July and August 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 0.3 percent in July and 0.2 percent in August.

The spending and income figures are not adjusted for price changes.

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.

Thus far, consumers are keeping their pocketbooks and wallets sufficiently open to keep the nation's cash registers humming and the economy's rebound chugging forward.

Many analysts believe the economy is growing at a rate in excess of 5 percent in the current quarter and should be able to maintain growth above 4 percent in the final three months of the year.

That forecast, if it proves to be correct, would represent the strongest back-to-back growth rates since the last two quarters of 1999, a period in which the economy was headed toward a record 10-year long economic expansion.

Still, analysts cautioned that they have predicted second-half economic rebounds for three years that have failed to happen as companies and consumers remained uncertain about the future.

Near rock-bottom short-term rates along with the latest round of tax cuts are helping to support consumer spending and offsetting the negative impact of a sluggish job market, economists say.

In August, businesses slashed jobs for the seventh month in a row. And, more recently, claims for unemployment benefits have remained stubbornly high.

In August, consumer spending on "durable" goods - costly manufactured products such as cars and appliances, went up by 2.8 percent, following a 3.3 percent increase in July.

Spending on "nondurables" such as food and clothes, rose by 0.9 percent for the second straight month. For services, spending increased by 0.3 percent in August, after a 0.5 percent gain.

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 August from 3.6 percent in July. The savings rate in August marked the best showing since February.

Amid signs that the economy is picking up speed, the Federal Reserve earlier this month decided to hold a key short-term interest rate at a 45-year low of 1 percent and hinted that the rate could stay there for some time. That might motivate consumers and businesses to step up spending and investment, thus boosting economic growth.