NYT’s Floyd Norris notes the obvious:

Overlooked in some of the analysis at the time was the most obvious fact of all: checks totaling $13.7 billion were being mailed out by Uncle Sam to millions of families. The checks, for the child tax credit, did not go to the poorest Americans, a fact that outraged liberal legislators who learned of the details only after the bill passed. And they did not go to wealthier Americans, who would have been more likely to save the money anyway. They went to the parents in between the two groups

With the tax rebate spent (see chart), now what will keep the economy moving?
Income Spike.gif

Norris adds:

It would be nice to think the profit surge would lead to more investment and more hiring. There has been a gradual increase in capital spending, which was cut after the 1990′s bubble burst. And there are reports of retailers stepping up Christmas orders after being favorably impressed by the back-to-school season. But hiring continues to lag and a big increase in Christmas orders could lead to a blue Christmas as retailers deal with excess inventory.

Another big tax cut seems unlikely, with the federal budget deficit ballooning and the costs of the Iraq occupation rising. So we may be left with what we had before: slow growth and an economy gradually recovering from the overinvestment of the bubble era, particularly in telecommunications and technology.”

After the tax-cut impact fades, consumption will lose a key driver and begin to slow. The best hope for this not to happen is if corporations start hiring, and we have seen some encouraging signs of that today in September Jobs data, which was a positive +57,000.

The fly in the ointment is the fact that the unemployment rate dropped to 6.1% because 550,000 workers simply dropped out of the labor market last quarter. Mathematically, that lowers the unemployment rate by 1/2% or so. A constant labor force participation rate (using the average for the past 10-years) would imply an unemployment rate of 7.1%. (source: ____ )

Spending growth cannot help but decline significantly unless we see layoffs stop and job creation develop, and ultimately accelerate.

Source:
They Spent the Tax Rebate. Now What Will Consumers Do?
FLOYD NORRIS, The New York Times
October 3, 2003

http://www.nytimes.com/2003/10/03/business/03NORR.html

Category: Finance, Media

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One Response to ““It was fun while it lasted””

  1. Jim Picerno says:

    Job creation is usually the solution to every economics challenge. There’s reason for hope in today’s employment report from the Labor Department. But will it continue, or is this just a temporary blip. I think you’re right, though, that the tax-cut bounce will soon fade and the economy will sink or swim on its own merit. The coming months will be critical.