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Say No to Holiday Jeer
The American shopper is doing just fine.


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Larry Kudlow

Consumers held up the economy over the past year and there’s no indication that personal spending is poised to nosedive. So why is there such little confidence in the American shopper?

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The latest report on our gross domestic product shows that consumers are spending at a 4.1% inflation-adjusted rate. Nothing wrong with that. Sure, fewer holiday shopping days this year could temporarily slow the volume of sales, but that’s of no consequence. If there is an obstacle to strong holiday spending, it could be that smart shoppers are playing a waiting game as they pressure stores to complete their price discounts. Traditionally, when the deepest discounting arrives in January, sales volume spikes. But this is a timing issue — not a consumer-health issue.

The economic fundamentals of the American consumer are sound. After-tax personal incomes are growing at a 3% rate. Money wages are rising at a 3.8% pace. Consumer revolving debt as a percentage of disposable income is a manageable 9%. And unemployment claims are declining below the 400,000 level, suggesting that today’s jobless rate — which is hovering just above 5.5% — will not go any higher and may well drop in the months ahead.

Jobs create income and income fuels spending. There’s no reason to lose confidence in consumers.

Then again, consumers and just about everyone else may be waiting to get a clearer view of next year’s tax-cut picture before stepping up the spending. Congressional Republicans appear ready to accelerate last year’s personal income-tax cut, a measure endorsed by President Bush. This could be coupled with the temporary payroll-tax holiday that is favored by many Democrats.

There may also be a number of investment tax incentives to spur on consumers and investors. These include reducing the double-tax penalty on dividends, adding to the investment loss deduction for individuals, and speeding up write-offs for business purchases of new equipment. Yet, with lower tax rates not yet locked in, both consumers and investors are in a holding pattern.

Hence, this tax-cut delaying effect may very well deliver softer economic growth in the fourth quarter. Hopefully lawmakers will announce early in the new year that all tax cuts will be made retroactive to January 1. This would encourage people to act quickly — by spending and investing — and we can avoid a protracted economic slowdown.

Supply-siders argue that you can’t induce consumer spending without jobs, and that business creates jobs. Yet even from this angle, consumer spending seems in fine shape.

Businesses invested in capital goods at a 6.6% annual rate in the third quarter, following a 3.3% gain last spring. Spending on information processing is up 14.4%, and within this total outlays on computers and software are up 47% and 11% respectively. These are impressive business-spending totals, and they are one reason why unemployment claims are shrinking. Again, an employed workforce is a workforce that spends.

Meanwhile, domestic corporate profits are up 20% on a pre-tax basis over the past four quarters, roughly in step with the stock-market rise that began in early October. Here, in a stock-market sense, the consumer is underrated once more. Over the past seven weeks info-tech and telecom shares have gained by over 40% on a combined basis, but cyclical consumer stocks have increased only 17%, under-performing the overall S&P 500 gain. Meanwhile, steady-eddy consumer staples like Kellogg and General Mills have actually declined by 2% during the market rally. This indicates that it might be a great time to take some profits in the tech area and reallocate the cash proceeds into the consumer area.

No matter what happens in the coming weeks, next year’s economic outlook is bright. Besides expected tax cuts, the Federal Reserve has made it clear that it intends to leave the money spigots wide open for a good long time. With easy credit at record-low interest rates, rapid money growth will finance new tax cuts — as well as price cuts on products across-the-board.

Businesses with strong top-line sales revenues should generate double-digit profit gains even without much pricing power. Those profits will expand the job force and the wages and salaries necessary for consumer spending. And an improved stock market will create more wealth, especially if Uncle Sam reduces obstacles to dividend payouts and lowers the tax cost of investment and risk-taking.

It’s a pretty good picture and people should stop bellyaching. It may be too much to ask for the media talking heads to turn optimistic, but the average Main Street family knows that we have plenty to be grateful for this holiday season.



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