Save or spend? Stimulus Act to test consumer resolve

NATIONWIDE RT REPORT—Prepare to be stimulated.

The retail industry next month should begin noticing an uptick in consumer spending if an economic stimulus package approved earlier this year works as intended. Beginning in May, the first of an estimated 130 million U.S. households will receive checks ranging in size from $600 to $1,200 totaling $105.7 billion to be distributed this spring and summer. Ultimately, the stimulating effects of the cash infusion will depend on whether consumers follow through on their stated intentions to save the money or pay off bills.

The National Retail Federation surveyed consumers even before President George W. Bush signed the Recovery Rebates and Economic Stimulus for the American People Act of 2008 into law on Feb. 13. NRF’s research found nearly 41% of the approximately $105.7 billion to be distributed would be spent immediately, based on the response of people who were asked if they receive a check, “What will you do with the money?” Survey respondents also indicated 28% of the money received would be used to pay down debt and 19% would be saved. A second, more recent study conducted in March by the Web site Creditcards.com produced similar results. That study indicated 25.6% of the money would be used to pay debt, 23.5% would be saved and 20.8% would be spent on living expenses.

Ideally, for the economic stimulus program to achieve its desired effect, consumers would spend most of the money and save very little. That could actually prove to be the case, because consumers’ stated intentions often don’t align with their actual actions, and found money, such as rebate checks, tends to be spent.

At least that was the case the last time the federal government attempted to stimulate the economy. In 2001, consumers received checks ranging in size from $300 to $600 that totaled $38 billion as part of the Economic Growth and Tax Relief Reconciliation Act. Researchers with the Bureau of Labor Statistics, Princeton University and the University of Pennsylvania who examined the impact of that program years later determined it had a significant impact.

“Our finding simply [showed] that the rebates provided a substantial stimulus to the national economy, helping to end the recession of 2001,” the researchers wrote in their August 2005 paper. They concluded personal expenditures increased 0.8% in the third quarter of 2001 and 0.6% in the fourth quarter, as roughly two-thirds of the rebate amounts were spent within six months of being received.

The pace at which spending takes place during the current economic climate could be influenced by several factors that were not in play during 2001, namely food price inflation and high gasoline prices. The NRF study revealed 9% of the 2008 rebate amounts will be spent on household necessities such as groceries, and another 5.3% would be used to buy gas.

While gas prices in 2001 were considered high at the time, they were still below $2 a gallon, whereas in early April this year, the average national price for a gallon of regular, according to the American Automobile Association, was $3.29, compared to a year earlier when it was $2.70. High oil prices have had a ripple effect on the economy and led to increased commodity prices, which in turn has everyone paying more for food, whether it is at the supermarket or in a restaurant.

Gas and food are certain to account for a larger portion of the rebate dollars than they did in 2001, but those factors are likely to be offset by the fact that the more generous $105.7 billion paid out this year, versus the $38 billion paid out in 2001, will give consumers more money to spend. Of course, throwing money at any problem seldom, if ever, provides a long-term solution to the underlying issues at the root of the problem, and that will likely be the case with the nation’s economy in 2008.

Be that as it may, the retail industry is poised to benefit over the course of the summer and during back-to-school season as 130 million households face the prospect of deciding what to do with the money they find in their mailboxes.