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Monday Report on Consumers Will Provide Crucial Economic Clues

Peter Morici

NEW YORK (TheStreet) -- Preliminary reports indicate the economy grew at a disappointing 2.5% in the first quarter, but more than 40% of that growth came from inventory investments, not final sales of goods and services, which are tracking at a much weaker pace.

Much weaker growth is expected for the second quarter, as the $165 billion worth of January tax increases dampen consumer spending. Monday's March consumer spending report will provide a good first indicator of where the overall economy is tracking this spring and early summer.

The bright spot in the GDP report: Consumer outlays advanced 3.2%, but most of that appears attributable to the spending year-end bonuses and dividends paid in advance of the January 2013 tax hikes. Retail sales fell significantly in March, and another poor report is expected for April.

Simply, the January tax increases took away $165 billion in purchasing power but did not affect consumer behavior immediately -- thanks to the surge in year-end bonuses and dividends, and the normal lags in consumer behavior.

Working- and middle-class families must keep driving to work and feeding their children -- now car dealers and shopping malls report slowing sales. Many upper-income families pay taxes on a quarterly basis, and the actual impact of the quite complex changes to the tax code and rates implemented in January were not reckoned until their accountants computed their first-quarter payments due April 15.

Monday, the Commerce Department reports consumer spending data for March. The consensus forecast is for a very-modest 0.1% increase, but with energy prices falling, that may translate into a somewhat larger bump to real spending.

This report, along with Friday's jobs report, will provide the first and best indicators of whether the economy slowed significantly in March, and whether the "spring swoon" is the new hit tune economists sing this spring.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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