Thursday, February 14, 2008

Recession will be difficult to avoid, even with the Federal Reserve’s dramatic interest-rate cuts and the $152 billion stimulus package President Bush signed into law yesterday, but economists say the extraordinary measures will help to cushion any downturn and promote a speedy recovery.

Over two years, the package is worth $168 billion.

Experience with tax rebates in 2001 shows that consumers will quickly spend 60 percent or more of rebate checks the Treasury sends out between May and July, ranging from $300 for the lowest-income workers and seniors living on Social Security checks to $1,800 for married couples with two children. Because consumers account for about 70 percent of economic activity, that will give an important boost to growth.

Tax rebates helped make the 2001 recession one of the mildest on record, and one of the easiest on consumers, who barely skipped a beat and kept on spending during the downturn. Economists hope that experience will be repeated this year.

“A U.S. economic-stimulus program can’t come a moment too soon,” given the breadth of the economy’s woes from falling home values to rising unemployment, said David Wyss, economist at Standard & Poor’s Corp.

“The hope is if they get money into consumers’ hands, they will rush out and spend it as quickly as possible,” he said. Recent surveys of consumers show that nearly half say they will use their $100 billion of rebates to pay down debt, but what consumers say often is different from what they do.

Consumers riddled with debt in recent years have had a propensity to spend nearly all of their incomes and are saving next to nothing, so Mr. Wyss said he is not too worried they would bank their rebates for another day.

In any case, given the current mortgage crisis marked by record foreclosures and defaults, economists say paying down debt would not be a bad use of the money, either.

While Congress and Mr. Bush hoped to avert a recession by passing the package, Mr. Wyss said the stimulus probably comes too late to do so. Economic reports show a recession could have begun as early as December or January.

“The result should be a more modest recession,” Mr. Wyss said. Even in combination with the Federal Reserve’s deep interest-rate cuts, “it’s probably not quick enough to prevent a recession from occurring.”

“It’s not a whole lot of money, but I think I am going to save it. Either that or pay some bills,” said Joseph Gormley, assistant dean of students at Gonzaga College High School in the District.

Robert Robinson, a Texas retiree, said he and his wife will use their $1,200 rebate to bolster their savings, which have been depleted by a drop in interest earnings on his retirement fund.

How consumers spend their rebates can make a difference for the economy. While spending on services such as health care, education, housing and utilities mostly helps domestic businesses and the economy, spending on goods such as clothing and autos is just as likely to stimulate imports and the economies of other countries with little benefit at home.

A study by the U.S. Business and Industry Council found that more than 60 percent of goods purchased by U.S. consumers come from overseas, including 90 percent of women’s coats and nonathletic shoes, and 96 percent of men’s shirts.

Federal Reserve Chairman Ben S. Bernanke testified he expects some of the stimulus to “leak” into the economies of U.S. trading partners, but he nonetheless urged Congress to act quickly on tax rebates to help cushion the U.S. economy.

“There are legitimate questions about how much bang policy-makers will get for each rebate buck,” said Richard Berner, chief economist at Morgan Stanley. “Imports and inventory will satisfy some of the pickup in demand.”

The legislation wisely skews the rebates toward low- and middle-income consumers, who are more likely to spend them rather than sock them away in savings, Mr. Berner said. Morgan Stanley is assuming conservatively that 40 percent of the rebates will be spent, boosting consumer spending by three-quarters of a percentage point in the summer.

The plan’s $47 billion in investment incentives, which businesses must “use or lose” before the end of the year, also will boost growth significantly, he said, though by having the effect of furthering spending plans from 2009 it will cause a “payback” in slower growth next year.

Because the business tax breaks and consumer rebates are temporary and will “fizzle” quickly, Mr. Berner does not think they will save the economy from recession. Morgan Stanley predicts the economy will contract at about a 1 percent rate in the first half of the year before rebounding strongly by 4.5 percent in the summer quarter, largely on the strength of the temporary stimulus.

“Recession has arrived, in our view,” he said. “The economy faces a rocky road ahead.”

The White House and some optimistic analysts hold out hope the economy will keep growing this year, although most economists now say recession is likely.

Mr. Bush said in signing the bill that the U.S. still has “the strongest and most resilient economic system in the world” because of its ability to “absorb shocks and emerge even stronger.”

But Harvard University economist Martin Feldstein said the stimulus package and deep interest-rate cuts don’t guarantee either that the economy will avoid recession or that any downturn will be minor.

Mr. Feldstein, whose National Bureau of Economic Research is the official arbiter of recessions in the U.S., said the serious financial problems being encountered by banks, homeowners and other borrowers may prove to be an overpowering drag on the economy.

The only part of the stimulus package targeted at the ailing housing market, a root cause of the economic troubles, are provisions allowing Fannie Mae and Freddie Mac to temporarily purchase jumbo mortgages of up to $730,000 while enabling the Federal Housing Administration (FHA) to insure such mortgages.

Those provisions could be powerful in averting foreclosures among people holding mortgages that are due to reset at higher interest rates this year, said Dick Gaylord, president of the National Association of Realtors.

Increasing FHA loan limits will help an additional 138,000 Americans achieve the dream of homeownership and will allow nearly 200,000 homeowners to refinance and potentially keep their home,” he said.

“Increasing the loan limits for Fannie Mae and Freddie Mac will bolster the housing finance market, which continues to be severely stressed, by providing an immediate infusion of much-needed liquidity to the nation’s mortgage market,” he said. “While such an increase will not solve the full range of housing challenges, it will play an important role in improving the nation”s economy.”

The Realtor group estimates the measure will facilitate as many as 500,000 jumbo-loan refinancings and reduce foreclosures by as much as 210,000. In addition, more than 300,000 additional home sales could be generated.

Pankaj Jha, mortgage analyst at RBS Greenwich Capital, said the caps the legislation puts on the increase in jumbo-loan limits, which is set at 125 percent of an area’s average median home price, will halve the number of loans that could benefit from refinancing under the provision to about 35 percent of the $2.6 trillion jumbo-loan market.


Sample tax rebates under the economic stimulus plan President Bush signed into law:

TaxpayerQualifying incomeRebate

Single $3,000 in Social Security benefits $300

Single $50,000 in earned income$600

Single with

one child$50,000 in earned income$900

Married couple

with two children $60,000 in earned income $1,800

Married couple

with four children $70,000 in earned income $2,400

Source: Commerce Clearinghouse


Morgan Stanley economists predict the economic stimulus package could boost economic growth to 4.5 percent this summer, but that the benefits will dissipate later this year.

Expected economic growth:

1st quarter without stimulus: —0.75 percent

with stimulus — 0.75 percent

2nd quarter without stimulus —1.0 percent

with stimulus —1.0 percent

3rd quarter without stimulus 0.5 percent

with stimulus 4.5 percent

4th quarter without stimulus 2.0 percent

with stimulus 2.2 percent

Source: Morgan Stanley Research

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