The millions of economic stimulus payments gave a massive jolt to household finances in May, sending after-tax incomes up by the largest amount in 33 years.
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 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.
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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.
A separate survey of consumer confidence released Friday gave support to those concerns. The University of Michigan Index of Consumer Sentiment dropped to 56.4 in June, the lowest reading in 28 years and a stark reflection of all the problems facing the economy at the moment.
“Surging gas prices, high food prices, disappearing jobs, declining home values and record foreclosures were cited by consumers as the basis for their pessimism and most consumers expected each of these problems to continue to worsen in the months ahead,” said Richard Curtin, director of the survey.
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 concerned over the impact soaring energy prices and a slumping financial sector will have on future growth. Oil prices continued to trade on Friday above the $140 per barrel mark.
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 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.