Consumer Spending Drops Sharply

Consumer spending took its biggest drop in more than a year in March, as computer-caused delays at the IRS deprived Americans of federal income tax refunds. That meant a sharp drop in after-tax income, the government reported Wednesday.

In another report, the Federal Reserve said the U.S. industrial operating rate showed no improvement in March as imports continued to siphon away sales from domestic manufacturers.

The declines in disposable or after-tax income sent consumer spending down 0.5% last month, the Commerce Department said.

Economists tended to discount the weakness reflected in the tax processing foul-ups. They predicted that consumer spending and disposable income would both bounce back later this spring when the tax-refund checks finally get delivered.

But they said the ripple effect would make economic activity appear weaker during the first three months of the year than it otherwise would have been.

The report said Americans’ disposable income, the amount left after paying taxes, fell 0.5% in March following a 0.8% February decline. The February drop was the biggest in almost a decade, since a 3.2% fall in June, 1975.

The declines this year were blamed on Internal Revenue Service problems with a new computer system. The IRS said last week that the backlog in unprocessed returns had swollen by more than 50% from a year ago because of the computer problems.

The Commerce Department estimated that the delays had reduced total refunds by $2.4 billion in February and $4.3 billion in March. The fact that Americans did not have the refund money to spend in those months reduced their disposable income by like amounts.

The drop in disposable income helped to send personal consumer spending down in March for the first time since October. The 0.5% March decline was the largest drop since a 0.9% setback in February, 1984. Consumer spending rose 0.9% in February.

Consumer spending has been the driving force behind the current economic recovery, but analysts tended to discount the weakness shown in the March figures.

“These numbers should not be interpreted as a broad weakening in the economic recovery but rather as a temporary impact from the delay in tax refunds,” said Robert Wescott, senior economist at Wharton Econometrics. “As the government finally starts paying people off, we will see incomes boom in April, May and June.”

Part of the optimism stems from the fact that overall personal income, before adjusting for taxes, has been rising steadily as the number of people working continues to grow.

John Albertine, president of the American Business Conference, said that the tax-refund delays had “skewed the statistics on disposable income” but that the before-tax income gains showed that the economy “is still humming along right on track.”