What do you know, as a result of the tax rebates the month of may has seen the largest income jump in 33 years. It is incredible what happens when you let people spend their OWN money. If elected, Senator Obama promises to let the Bush tax cuts lapse and get rid of FICA limit. Here’s a little note to the “Chosen one” TAX CUTS Work.
The payments helped boost consumer spending by the largest amount in six months.
The Commerce Department reported that disposable incomes, the amount left after paying taxes, surged by 5.7 percent last month. It was the biggest increase since May 1975, reflecting $48.1 billion in rebate payments made last month. The surge in incomes helped boost consumer spending by 0.8 percent, the biggest gain since last November.
The administration is hoping that the $106.7 billion in stimulus payments being made this year to 130 million households will be enough to offset serious drags on the economy at the moment from a prolonged housing slump, a severe credit crisis and soaring energy bills.
However, economists are worried that the boost from the stimulus checks will be only temporary and once the checks are spent, the risks of the economy falling into a deep recession will increase.
Worries about the economy showed up in turbulent financial markets this week with the Dow Jones industrial average plunging by nearly 360 points on Thursday to the lowest level in almost two years. Investors were worried about the impact soaring energy prices and a slumping financial sector will have on future growth.
The rebate checks are part of a $168 billion package of tax relief for individuals and businesses that Congress passed in February at the urging of the administration in an effort to give the economy a boost and ward off the threat of a deep recession. The payments began on April 28 and are scheduled to be completed by mid-July.
The Bush administration currently is resisting Democratic calls for a second stimulus package even though economists are worried that the effects of the boost will prove temporary at best. They fear the stimulus will fail to prevent a serious slump in the second half of this year as the economy’s troubles from housing, a severe credit squeeze and soaring energy prices mount.
For May, overall incomes rose by 1.9 percent after a 0.3 percent rise in April. Part of that increase reflected the portion of the stimulus payments that are going to low-income individuals. But the bigger impact showed up in after-tax incomes, which shot up by 5.7 percent in May after a 0.4 percent rise in the month before, reflecting the bulk of the stimulus payments, which represent a tax break for most households.
The hope is that the stimulus payments will do the trick to bolster consumer spending, which accounts for two-thirds of total economic output.
For May, consumer spending jumped by 0.8 percent, double the 0.4 percent gain in April. Excluding the effect of rising gasoline and other price increases, inflation-adjusted spending rose by 0.4 percent in May, the biggest one-month increase since last August.
A closely watched inflation gauge tied to consumer spending was up 0.4 percent in May but excluding energy and food, the increase was a much smaller 0.1 percent. Over the past 12 months, core inflation excluding food and energy is up 2.1 percent, just above the Federal Reserve’s comfort zone.
The Fed earlier this week brought an end to an aggressive string of interest rate cuts designed to protect the economy from toppling into a deep recession, citing increased worries about inflation pressures coming from surging energy prices.
The big increase in after-tax incomes based on the surge in stimulus payments pushed the personal savings rate to 5 percent, the highest level since May 1995. Personal savings represent the amount of after-tax income consumers have left after deducting their spending for the month.
Meanwhile, the Fed was scrambling to prevent a “contagion” from infecting the nation’s financial system when it took unprecedented actions to save several Wall Street firms, reports CBS News correspondent Peter King.
Newly released documents show Federal Reserve officials felt an immediate collapse, particularly at Bear Stearns, would mean a contagion, a spread of financial shock that could ruin the financial system and send the country into a recession, King reports. The Fed agreed to back up the $30 billion in JP-Morgan’s takeover Bear Stearns, and said it would make emergency loans available to keep other large firms from going under.