Disposable Income Dips 0.9% in April as Higher Federal Taxes Take Toll

Americans’ disposable personal incomes fell 0.9% in April, the steepest drop in a year, as tax payments took a big bite out of paychecks, the Commerce Department reported Friday.

It was the first decline in disposable income since last November and the biggest setback since a 2.5% plunge in April, 1987, when federal taxes took an even bigger chunk of Americans’ incomes.

Faced with higher tax bills, Americans balked at taking on any big purchases, leaving spending basically unchanged in April after a big 0.8% rise in March.

Before adjusting for taxes, personal incomes edged up a tiny 0.1% in April after a giant 1.1% rise in March.

Analysts said they were not unduly concerned about either the weak income growth or the lackluster spending in April, saying the month was influenced by a host of special factors.

They noted that in addition to tax bills, spending also was depressed by the impact of an early Easter which meant consumers did their shopping in March, siphoning off sales that normally would have occurred last month.

The income gain looked weaker because the March figure had been inflated by annual bonus payments made to workers at Ford Motor Co. plus a big jump in farm subsidy payments.

Excluding those factors, incomes before taxes would have risen 0.6% in April and 0.3% in March.

But economists said that the big drop in the important category of disposable income will have some effect in coming months.

“After the shock they got in April, I think people will adjust their withholding statements to have more taken out of their paychecks. That will be a slight damper on consumer spending,” said John Hagens, senior economist at the WEFA Group, an economic forecasting firm.

But analysts said they were not too concerned because of Thursday’s report that the economy was far stronger in the first three months of the year than previously believed. The government revised its estimate of overall growth, as measured by the gross national product, up to a brisk 3.9%, compared to an original estimate of 2.3% GNP growth.

Hagens said he now believed that growth for the year would come in at between 3.5% and 4%, up as much as a full percentage point from his original forecast.

The National Assn. of Business Economists released a new survey Friday that also boosted the growth estimate for the year to 2.9%, compared to a forecast a month ago of GNP growth of 2.2%.

Kathleen Cooper, chief economist at Security Pacific National Bank in Los Angeles, said the survey, taken in mid-May, would probably show even higher forecast now, based on the big revision to the GNP. The economy grew 2.9% in both 1987 and 1986.

But still a majority of those polled, 57.4%, believed that a recession would begin in 1989, brought on by rising inflation and higher interest rates.

“We see inflation coming in at 5% and that will cause the Federal Reserve to tighten further and that will raise interest rates,” she said. “Higher interest rates are normally the way we get into recessions in this country.”

The big decline in disposable incomes in April pushed the savings rate down to 3.8% last month, compared to 4.7% in March.

The Commerce Department report said personal tax payments climbed at an annual rate of $36.2 billion in April, compared to a March increase of $10.9 billion.

But this was still down from a huge $85.5 billion surge in tax payments in April, 1987, a year when many Americans ended up owing more because they had sold long-time investments at the end of 1986 to escape higher capital gains taxes under the new tax law.

Wages and salaries rose at an annual rate of $7.9 billion in April, down from a March increase of $15 billion that had been inflated by special bonus payments made by Ford Motor Co. Farm income fell $7.6 billion last month, compared to an increase of $19.4 billion in March, with federal subsidies accounting for the wide swing.

On the spending side, purchases of durable goods fell by $4.3 billion while purchases of non-durable goods dropped $14.1 billion. Purchases of services, which include housing costs, climbed $11.6 billion.