US public takes July tax cut and saves it for a rainy day
Washington — In July, US consumers found a very pleasing thing in their wallets and pocketbooks - more money than was there the month before. In some cases, a lot more.
But the public didn't spend much of this windfall. They saved it, instead.
That restraint, say economists, will help keep the economic recovery from running out of control.
''Some moderation in consumer spending is probably desirable,'' says Ronald Utt, deputy chief economist of the United States Chamber of Commerce.
Disposable personal income, the amount of cash you have to spend after taxes are subtracted, went up 1.7 percent nationally in July, the Commerce Department said Thursday.
That's the largest increase of cash in the pocket since July 1981. The amount of money you have before paying taxes (''personal income,'' in the the Commerce Department's lexicon) went up a more modest 0.6 percent last month.
Much of the rise was caused by the third and final installment of the Reagan administration's 25 percent income-tax cut. The July 1 cut added $29 billion to consumer purchasing power, at an annual rate, estimates the Commerce Department.
It is unlikely, however, that this new cash is burning a hole in people's pockets. Earlier this year, anticipating better times ahead, consumers began making purchases they'd put off during the recession. In May, for example, consumer spending took a sharp, 1.7 percent jump.
''Consumers started to spend the tax cut before they got it,'' says Ben Laden , chief economist of the mutual-fund firm T. Rowe Price. ''We've already seen some moderation from the spending pace (of May).''
During the summer US shoppers stopped to rest and regroup. In July, spending cooled to a 0.4 percent pace. That means that much of the increase in disposable personal income was saved, instead of used to buy a new color television, or a car, or part ownership in a steel mill.
That's important because the US public had been saving very little money.
In June, Americans saved 3.7 percent of their disposable income - an ''extraordinarily low'' savings rate, according to the Commerce Department's chief economist, Robert Ortner.
In July, the savings rate increased to a better-but-not-spectacular 4.9 percent.
In general, an increased savings rate has the beneficial effect of creating a larger pool of capital for investment.
Right now, say economists, more saving by consumers may also help sustain the recovery by cooling off the economy slightly at a time when interest rates have started to creep upward once more.
''Consumer spending helped kick off the recovery,'' says Mr. Utt of the Chamber of Commerce. But he says the rebound is now broad-based enough to keep going if consumers cut back.
Even though there aren't any more income-tax cuts looming on the horizon, income gains should stay strong in the months ahead, say many economists. As the recovery rolls along, more people will go back to work, and more people will receive pay raises.
A Citibank economist estimates that personal income will soon be growing ''in the neighborhood'' of 1 percent a month.
Dr. Laden of T. Rowe Price says income gains in August will be 0.8 to 1.0 percent.
And personal spending is unlikely to rise once again to the high levels of spring.
''We'll get modest increases in consumer spending,'' says Sandra Shaber, a senior economist at Chase Econometrics. ''I don't think there's been a decline in consumer confidence at all.''