Tax-cut spending called critical to recovery

Jodi Fields is eyeing a digital camera. Luigi Esposito is buying a new boat. Jack Manasco is saving for a rainy day. What Americans do with the fatter paychecks or child tax-credit checks from President Bush's latest tax-cut package will play a critical role in the strength of the economy's anticipated rebound this year.

The more consumers spend their tax windfalls, the better for the economy's budding revival. Consumer spending accounts for roughly two-thirds of all U.S. economic activity.

Fields, of Potomac, Md., is thinking about buying a digital camera with the $400 check that will arrive in her mailbox soon. "It's kind of like found money," said Fields, who has one son and another child on the way.

Mark Zandi, chief economist at Economy.com, predicts consumers will spend about half of their tax break.

While some Americans tend to be savers, most are spenders, said Daniel Howard, a consumer behavior specialist and chairman of the marketing department at Southern Methodist University Cox School of Business. "Consumers typically have a list of things they want to obtain sitting on the back burner," he said.

"We believe the $400 checks, in particular, are going to have a significant, positive effect on consumer spending," said Lynn Reaser, chief economist at Banc of America Capital Management. "Some of those results are already showing up in retailers' numbers."

A strong, 1.4 percent increase in sales at the nation's retailers in July -- the best showing in four months -- partly reflected the impact of the tax cuts, economists said. Back-to-school sales also are expected to help out, analysts said.

Federal Reserve chairman Alan Greenspan and private economists are betting that the combination of the tax cuts and near rock-bottom short-term interest rates will motivate people to spend more and encourage businesses to boost investment, thus lifting economic growth in the second half of this year.

President Bush -- mindful that his father's re-election loss in 1992 was attributed in part to a weak economy -- pushed for a third round of tax cuts, arguing that they would bolster the economy and create jobs. Congress passed the tax cut in May.

Democrats counter that the tax cuts have not energized the job market, have benefited mainly the wealthy and are creating record budget deficits.

For Esposito, an executive at a New York financial services firm, more take-home pay from lower federal tax withholdings means extra cash to put toward a new boat. "I'll do a little of each -- save and spend," he said. Manasco, a Kenner, La., bank employee, quickly deposited his rebate check in a bank account "for that rainy day in case something happens, an unexpected expense."

Economist Zandi estimates that the tax cuts will boost economic growth in the second half of this year by one-half percentage point to an annual rate of 3.3 percent, an improvement over the lackluster 1.9 percent growth rate seen the first six months of 2003. Other economists are calling for economic growth in the second half of the year to clock in at 4 percent or more.

Ryan Nash, a technical writer in Des Moines, Iowa, is doing his part to keep the economy going. "I have more money to spend every two weeks when I get paid. I do buy extra things with that money," he said. Nash, who has one child, also received a child tax-credit check. The extra money will be used to repair his hail-damaged car, he said.

April Hooks of Indianapolis said she used her $400 child tax credit to pay for her daughter's school books and buy license plates for her car.

Mike Troullas, a computer technician in Vernon, Conn., spent his $400 child tax credit check on day care for his two-year old son.

Some, like Cheyenne, Wyo., car salesman Adam Morgan, plan to use the money to pay off debt. "We just maxed out our credit cards on the wedding," he said. "That's what we need to do is pay down our credit cards."

Others say they won't be in a rush to spend the money -- opting instead to save it for when it's really needed.

"I would put it in their savings accounts and use it for school clothes or let it sit there for educational purposes," said Dwayne Thomas, a father of three girls in St. Louis. Some of the money might be put toward Christmas presents, he added.

Linda Brandon, a sales manager for a cruise company in Anchorage, Alaska, plans to bank the child tax-credit money for her two children. "It's $800. That's a lot of money. We'll put the money into the kids savings accounts," she said.

Mary-Ellen Meadows of Plymouth, Mass., a psychologist and mother of two daughters, also plans to save the $800 in child-tax credits she received. "We're OK, but there are a lot of people who are not," said Meadows, whose husband works as a manager for Amtrak.

A person's decision to save or spend is shaped by one's perception of the economy and their own personal experiences, said Ann Owens, an associate professor of economics at Hamilton College. Some savers, she said, may be influenced by newspaper headlines of exploding federal deficits or decisions by some cash-strapped state and local governments to raise taxes.

"I've got three kids going through college, so that's where my extra money will go, although I haven't seen it yet," said Jay Spooner, a Fargo, N.D., businessman. "There are a lot of people living paycheck to paycheck."