Tax Rebates Boost Consumer Spending

MBA (6/30/2008 ) Velz, Orawin
Last week provided one piece of evidence that the fiscal stimulus payments did what they were designed to do—stimulate the economy.

After adjusted for inflation, real personal consumption expenditures (PCE) rose 0.4 percent in May—the biggest gain since December 2006. This was good news for economic growth in the second quarter because consumer spending accounts for about 70 percent of gross domestic product (GDP).

Last week’s durable goods orders report also bodes well for economic growth. While durable goods orders were unchanged in May, shipments for nondefense capital goods excluding aircraft—a component used in the calculation of GDP in the current quarter—rose 0.6 percent. The figure for April was also revised upward.

It appeared that the economy continued to grow in the second quarter, following 1.0 percent growth in the first quarter, according to the final report of GDP released last week.

While the tax rebates have helped spur spending, measures of consumer confidence for June were at levels typically seen in a recession. The Conference Board Consumer Confidence Index has reached its lowest reading since February 1992 and its fourth lowest since the record began in 1967. The University of Michigan Consumer Sentiment Index slipped to the lowest reading since May 1980.

One factor weighing down consumers is the ongoing housing downturn and the resulting declines in home prices, which are more severe in some areas than others, according to two measures of home prices released last week, one from the Office of Federal Housing Enterprise Oversight and the other from Standard and Poor’s.

Separate reports on May home sales were mixed. New home sales declined 2.5 percent, while existing home sales were up 2.0 percent.

During the current housing downturn, existing home sales have performed considerably better than new home sales. Sales of total existing homes during the first five months of this year were down about 19 percent from the same period last year, compared with a year-to-date decline of about 38 percent for new home sales. One explanation is foreclosure or distressed sales, estimated to account for nearly one-third of the market currently, according to the National Association of Realtors.

Treasury yields steadily declined through the week. Stock sell-offs triggered by record oil prices, which breached $142 a barrel on Friday morning, and credit market writedowns led to Treasury market rallies in a flight to quality.

The yield on the 10-year Treasury note stayed around 3.97 percent by mid-Friday afternoon—19 basis points lower than the rate on the previous Friday and the lowest rate in three weeks.