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Free spenders send US economy off to a fast start in first quarter

By Harry B. EllisStaff correspondent of The Christian Science Monitor / April 21, 1981



Washington

US consumers have confounded the experts by continuing to spend freely, thus giving a robust glow to the economy in the first quarter of 1981. The year, says chief White House economist Murray Weidenbaum, is off to a "nice start" with a 6.5 percent spurt of economic growth in the January-March period.

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Mr. Weidenbaum and other experts warn that the rest of the year may be slower and that the economy already shows signs of flattening. But, in the months just past, millions of Americans appeared to believe that buying a new car, refrigerator, or roof for their home was a better investment of their money than putting it into a bank, where inflation would erode its value.

There was good reason for this: The first quarter was a period of automobile rebates and department store sales, which knocked down the prices of shoes, clothing, durables, and a host of other things. But many experts believe the free-spending mood reflects something deeper --here to stay or, at the very least, will not subside quickly.

Normally, high interest rates would choke consumer buying, and the economy would slide downhill. That no longer appears to be true, or at least the process is slower.

"We have," says economist Charles L. Schultze, "been way understating the resiliency of the economy in the face of high interest rates."

Tax laws, experts point out, also contribute to a sense of "buy now, pay later." Interest earned on savings accounts is taxed. Interest paid on loans is tax-free and reduces taxable income. For many two-income families, who are pushed by inflation into high tax brackets, it may seem to be good sense under current law to cut their taxable income by taking on debt.

Also, when inflation is running at 10 percent, a debt assumed at 18 percent is repaid with steadily cheapening dollars, reducing sharply the real rate of interest.

The first quarter growth figures reflect conditions prevailing before President Reagan took office and were not affected by the White House economic program. But the results have implications for that program.

US unemployment may be somewhat lower than expected, because the economy grew briskly during the first three months. More Americans at work would swell US Treasury tax revenues and reduce the amount of money spent by government on unemployment compensation and related costs. This would be good news for the budget.

On the other hand, inflationary pressures show little sign of slackening. This puts upward pressure on interest rates, as the Federal Reserve Board responds to inflation by clamping down on the money supply. The Fed's monetary goals for 1981 are even tighter than the tight targets of 1980, which squeezed credit enough to send interest rates to record heights. Most analysts expect the economy to slow sharply in coming months, as high interest rates dry up some business demand for loans.

Inflation also increases government outlays, partly because of higher interest on the national debt, partly because benefit payments to more than 35 million Americans are indexed to the consumer price index.

Higher social security taxes also are taking an extra bite out of family pocketbooks. Nonetheless, consumer behavior will be hard to chart if inflation remains high.

"While there is still inflation," says a housewife, "people try to preserve their treasure by converting dollars into items they feel they need."

Two first-quarter statistics released by the government illustrate what she means:

* The national savings rate was 4.7 percent of income, down from the 5.1 percent rate of the last quarter of 1980.

* Personal consumption of durables -- purchases by Americans of big-ticket items such as major appliances and furniture -- climbed 3 percent over the fourth quarter of 1980.