- The Washington Times - Friday, June 13, 2008

Millions of taxpayers have received rebate checks ranging from $300 to $1,200, and they are starting to spend them with gusto.

A report from the Commerce Department Thursday showed they are giving a substantial boost to retail sales and providing critical support to the economy, just as Congress and the White House had hoped when they approved them in February.

Sales at retailers of all kinds - hardware and department stores, electronic and hobby shops, sports and clothing outlets, restaurants and gas stations - surged by 1 percent last month after a 0.4 percent gain in April, a much-improved performance after anemic showings at the beginning of the year.

Julio C. Hernandez, a sports store worker from Oregon, got his $600 tax rebate check a month ago.

“Woo hoo,” he said. “I’m going to buy gas and X7 paintball supplies.”

Brandon Carmody, an actor and musician based in Portland, Ore., said he used his $600 check to pay the rent and avoid getting evicted from his apartment.

“I put the money where it was urgently needed. It helped a lot,” he said. “It’s truly not much money in the grand scheme of things, but I know many who will be helped.”

“Apparently, a lot of households were simply not in a position to save the rebates amid soaring costs of living, notably higher energy prices,” said Harm Bandholz, an economist at Unicredit Markets, who was surprised at how quickly people spent the $48 billion of rebate checks distributed last month.

Even upper-income consumers, who were deemed less likely to spend their checks all at once because they are not as crimped for cash as low-income consumers, used the occasion to splurge on eating out and other things, Mr. Bandholz said. “They enjoyed the temporary increase in their spending scope and bought electronics or clothes.”

Amanda Crandall, a store manager from Grand Rapids, Mich., said she and her husband are giving half of their $1,200 check to a charity for children. “The other half we’ll spend greedily” on dinners out and filling up the gas tank, she said.

Roger Trew, a well-to-do New Yorker, said his $1,200 check just about canceled out the $1,252 tax payment he sent to the Internal Revenue Service on April 15.

Some consumers said they are using their rebates to indulge in a bit of fun. Cory Brubaker, a Los Angeles rock-and-roller, said he plans to buy a new guitar.

But in a vivid illustration of how record gas prices above $4 a gallon are draining a significant share of the rebates, sales at gas stations posted the biggest gain in last month’s retail report - 2.6 percent. All of that increase went toward paying higher prices, since consumption of gas in gallons actually declined by an estimated 1 percent to 5 percent during the month.

Janet Davis, a Florida driver outraged by high gas prices, said she is spending all of her rebate check filling up her tank.

“What exactly are we stimulating, the oil industry?” asked Jered Weaver, a Kansas motorist.

Victoria Lynn, a Wisconsin motorist, said she is setting aside her $300 rebate to pay for about three weeks of gas. “It’s easily spent. It isn’t that much.”

Rising prices for gas are not the only problem for consumers. The cost of imported oil soared 7.8 percent last month, but even prices for inexpensive housewares, toys, clothes and other consumer goods imported from China rose 3.5 percent in the past year as the Asian giant allowed its currency to appreciate against the dollar, according to a Labor Department report Thursday.

Rapidly rising prices are a principal reason that consumers sound gloomy and give poor ratings to the economy, even as they gleefully spend their rebates at the malls.

Consumer sentiment has dropped to the lowest levels in decades, with most people citing angst about surging fuel and food prices, difficulty finding jobs, and a housing and credit crunch.

Meanwhile, the hardships people in housing and real estate are encountering have forced many to use their rebates to make house payments or pay off debts and bills that have piled up.

Emmanuel Nimmons, a California construction worker having trouble finding work amid the housing slump, said he is using his check to pay down debt. “I’m going to go stimulate my bills, baby,” he joked.

Economists worry that the soaring cost of gas will overwhelm the benefit from the stimulus checks, since money spent on rising prices does not create jobs, and feeds inflation rather than economic growth.

Soaring food and energy prices will drain $180 billion from consumer purchasing power between December and September, assuming regular gas prices peak at about $4.25, said Richard Berner, chief U.S. economist at Morgan Stanley.

That would overwhelm the boost to purchasing power provided by $117 billion in rebates this summer, and is the reason Morgan Stanley maintains that the economy is in danger of a “double-dip” recession, he said.

Still, most economists were surprised at the resilience consumers are showing, despite the drumbeat of bad news this year. The sturdiness of consumer spending, which normally fuels 70 percent of economic growth, vindicates the Federal Reserve’s recent decision to focus more on fighting inflation and less on supporting economic growth, said Mr. Bandholz.

“The consumer refuses to die,” said Alan Ruskin, a financial strategist at RBS Greenwich Capital Market.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide