Spotlight on the Consumer

TIME'S economists look for the July tax cut to start the recovery

Will the consumer spend it or save it? That is the $50 billion question facing the U.S. economy. In July, the Government will begin giving out $39 billion in tax cuts, the second installment of the three-year personal income tax reduction that Congress passed last year, and $11.5 billion in increased Social Security benefits. If the American consumer quickly spends most of that money, the extra business that will be created should be enough to end the nearly yearlong recession. But if the consumer decides to hold onto that extra cash or to pay off his debts, the economy is likely to continue limping along.

That was the verdict of TIME'S Board of Economists, which met last week in Manhattan to assess the state of the U.S. and world economies. For now, the economists predict that consumer spending will increase sufficiently to give the U.S. a 3.3% annual growth rate during the second half of the year.

Consumers have reacted to past tax cuts by stepping up their purchases of autos, refrigerators, clothing and other goods. For example, they spent about 80% of the $9 billion in personal tax relief in 1964-65, setting cash registers ringing and helping spur a robust expansion. The expectation is that the American public this year, just as in 1964, will eventually spend most of the tax cut.

Nonetheless, the question marks hanging over the economy are more numerous than usual. Said Otto Eckstein, chairman of Data Resources, an economics consulting firm: "The test comes in August. We have to watch very, very closely the retail sales of July and August because if they don't go up, then we are in much deeper trouble."

There were a few hints last week that business might soon be starting to pick up a little. The Commerce Department reported that its index of leading economic indicators, which attempts to predict future business trends, rose .8% in April—its first increase in twelve months. Auto sales increased a surprisingly strong 12.3% during the middle ten days of May.

TIME'S economists saw other encouraging signs that the slump may soon end. Runaway inflation has subsided, enabling the public to stretch its money further. The Administration's $1.6 trillion defense buildup is also helping to stimulate a recovery. Corporations that have been decreasing their inventories appear ready to start restocking shelves. That would mean that companies may soon begin stepping up production and rehiring workers.

Continuing signals of economic weakness, however, were also evident last week. The value of new building contracts slid 16% in April. Housing starts are now running at an annual rate of just 881,000 units, compared with about 2 million five years ago.