Obscured by Clouds

JACKSON HOLE, Wyo. -- Do not get wrapped up in this tax-refund thing.

The first-quarter consumption increase is now a cinch to top 4.0% and may end up surging as much as 5.5%. Especially because it comes on the heels of a year during which consumption posted its biggest increase (4.8%) since 1984, such a performance is nothing shy of remarkable.

And it absolutely infuriates members of the slowdown crowd, who have been promising slower spending numbers each and every quarter for three years running.

Their reaction to yet another failed forecast is childish and predictable: The big spending increase owes to tax refunds. (The 4.5% increase during the fourth quarter of 1998 owed to

Furbies

. The 4.1% increase during the third quarter owed to kind weather. The 6.1% increase during the second quarter owed to exceptionally kind weather. And on and on and on.) Refund levels through the first eight weeks of the current season sit 16.1% higher than they did at this point last year; that accounts for the American ability to produce yet another eye-popping spending increase. Further, because refunds are peaking right now, we should expect materially lower consumption numbers during the second quarter.

Poppycock.

These people advanced exactly the same argument last year. It blew up in their faces then, and it isn't any less dangerous now.

If the ever-quickening pace of refunds we've seen in the 1990s is really so significant a spending factor that it can produce front-loading, then we certainly ought to see a steady history of bigger first-quarter consumption numbers and smaller second-quarter ones. But we don't. Check out the table above.

Go ahead and toss aside 1990 and 1991 because they were recession years. You're then left with seven observations. Three of them show spending growing more during the first quarter than it did during the second, three of them show the converse, and one shows the same (massive) rate for both quarters. Only in one of the past four years has consumption grown faster during the first quarter than it did during the second.

Spending is bound to turn in a sorry quarter once in a while. It rose a mere 1.6% during the second quarter of 1997, recall, after surging 4.3% during the first and before vaulting 6.2% during the third.

Maybe the second quarter of 1999 will prove to be such a quarter; anything's possible. But anyone basing such a prediction on the fading impact of tax-refund volume that accounts for less than 6% of total personal income in any given month ought to be thinking hard about why that same forecast has failed so miserably in the past.

There are 2.778 million more people working now than there were at this time last year, and they're making (on average) 3% to 4% more money. Employment and income are driving spending, and only material and sustained weakness there will produce material and sustained weakness in consumption.

Tax refunds are white noise.

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