April 29, 2008 / 2:29 PM / 9 years ago

What can tax rebates buy? Gasoline for 75 days

<p>A vintage street car passes a sign advertising the cost of gasoline at more than $4 per gallon in San Francisco, California April 23, 2008.Robert Galbraith</p>

WASHINGTON (Reuters) - In the 11 weeks since President George W. Bush approved tax rebates aimed at averting a recession, energy prices have risen so much that the country is now spending about $250 million more per day on gasoline.

As the U.S. Treasury races to get the rebates to households, beginning this week, it faces an uphill battle against inflation that is blunting the benefits of the $152 billion 2008 stimulus package.

There is a lot riding on what consumers do with these rebate checks. Depending on how much is promptly spent -- and on what -- it could mean the difference between the U.S. economy eking out marginal growth in the coming months or slipping into a deep recession.

It could affect whether the U.S. Federal Reserve keeps cutting interest rates. Also, the economy is likely to play a pivotal role in November's presidential election, which incumbent parties tend to lose when recessions hit.

With inflation eroding consumer buying power, the worry is that the rebate checks will prove insufficient to prop up the economy, particularly when poll after poll shows that households intend to use a large portion of the money to pay down debt or bolster savings.

The U.S. economy is dependent on consumer spending. Rising prices means the same dollar buys less of the goods and services that make the economy go.

"Every penny of gas price increases takes about $1.5 billion out of spending power for Americans," said Gary Balter, retail sector analyst with Credit Suisse in New York. "In other words, 50 cents wipes out over half the stimulus benefit for consumers."

If they use the rest to pay bills or buy food, that could quickly eat up the entire rebate check with only limited benefit to retail stores and other businesses that are hoping for a summer windfall, Balter said.

NO SPLURGING

Economists think economic growth came to a near standstill in the first quarter because of the slumping housing market, tightening credit conditions and rising food and fuel prices. Initial data on first-quarter growth is due on Wednesday.

While there are tentative signs that credit markets are stabilizing after nearly nine months of turmoil, there is little relief in sight on inflation. Oil near $120 per barrel points to higher gasoline prices to come.

Since Bush signed the economic stimulus plan in February, the average price per gallon of gasoline has jumped 64 cents to $3.60, according to government data released on Monday.

The stimulus plan includes about $106 billion earmarked for households this year, with the remainder going to businesses.

With daily gasoline consumption averaging about 395 million gallons, according to government projections, consumers could use the checks to buy gas for about 75 days at current prices, which wouldn't even get them through the summer driving season.

If gasoline prices had not risen since February, that money would have bought about 90 days of supply.

The rebates give up to $600 for individuals and $1,200 per married couple, with amounts varying based on income. Families with children can receive an additional $300 per child.

The White House seems to recognize that people may not be in a splurging mood. Bush said on Friday that the checks would "help Americans offset the high prices we're seeing at the gas pump and the grocery store." Back on February 13, when he signed the stimulus bill, he did not mention inflation.

Merrill Lynch economist David Rosenberg described the price pressure as a "shock to the system that is draining household purchasing power."

To be sure, $100 billion or so extra in consumers' pockets will help the economy. It represents about 2 percent of annual retail sales. Consulting firm Retail Forward estimates that households will spend $42 billion of the rebates this year, with the rest going to debt repayment and savings.

Retail Forward economist Frank Badillo estimated that retail sales -- excluding autos and gasoline -- would rise by 3.5 percent in the second quarter with the rebates, compared with 2 percent without them. In the third quarter, he thinks the impact will be even more dramatic, with sales up 6 percent versus 3 percent without the extra money.

Still, he does not expect anything more than a short-term blip. Years of strong consumer spending gains coupled with stagnant wages have left households heavily in debt. Just as banks have been forced to clean up their balance sheets as the credit crisis left them with hundreds of billions in bad debts, consumers may be in for a protracted period of retrenching.

"While the impact of the tax rebates is significant, it is unlikely that (they) will lead to a sustained economic rebound," Badillo said.

Editing by Tom Hals

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