Tax rebates have juiced economic growth, consumer spending and savings in recent months, and Treasury Secretary Henry Paulson expects the...
Tax rebates have juiced economic growth, consumer spending and savings in recent months, and Treasury Secretary Henry Paulson expects the boost will continue in the second half.
Now that more than half of the $168 billion — with payments ranging from $600 to $1,200 — has been distributed, experts fear the economy will go back to its old sluggish self. The checks came at a time when consumers were struggling with surging energy costs and shrinking home equity.
“We have long believed the impact of the rebate checks would be short-lived, similar to what occurred when rebates were distributed during the recession of 2001,” writes Deustche Bank Chief U.S. economist Joseph A. LaVorgna in a client note. The earlier stimulus was much smaller, totaling $38 billion.
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T. Rowe Price Chief U.S. Economist Alan Levenson estimates 80 percent of the checks distributed so far went into savings.
Even though just 20 percent was spent, the amount helped lift the annual rate of personal-consumption spending, adjusted for inflation, by 1.5 percent in the second quarter. “Rebates might have been a third of the growth in real spending,” Levenson says.
Likewise, the checks lifted second-quarter gross domestic product growth, which came in at 1.9 percent, he adds. Consumer spending contributed about 1.1 percentage points to that total, compared with 2.2 percentage points in the 2003 through 2006 period, says Levenson. “Given that we had these rebates, growth was still quite sluggish.”
Levenson expects bigger job losses and moderate but still high inflation to result in flat spending and GDP change for the year.
LaVorgna says a “sharp retrenchment” in household spending in the second half will cause consumer spending to grow at a skimpy 0.2 percent inflation-adjusted rate for 2008, the weakest level in 17 years.
The Treasury Department finished bulk mailings of the stimulus checks in the week ended July 11, after sending out 112 million individual payments totaling $91.8 billion.
Payments will continue as households file income-tax returns in coming months.