U.S. taxpayers will be receiving tax rebate payments of up to $1,800 starting today. The rebates are supposed to revive the faltering U.S. economy, but consumers are not going wild with their plans to spend the money.
Suze Orman explains why going on a shopping spree with this kind of unexpected money doesn’t make sense, even though that’s the idea behind the economic stimulus payments:
In case you feel you have a patriotic duty to splurge with your stimulus check, the way some politicians are urging (Bernanke, for one), let me reassure you that paying off debts goes even farther to stabilize the economy and shake off the problems that are causing the current recession. In case anyone needs to be reminded, the recession grew out of a financial crisis caused primarily by U.S. consumers owing too much money.
For about a quarter of a million families, the stimulus payments will make the difference in their mortgage payments that allows them to avoid foreclosure. If you use your stimulus check to pay your mortgage, you are not alone, and the benefit to the national economy if the bank doesn’t have to kick you out on the street is substantial. (All the more so now that home vacancies are at the highest levels ever recorded.)
Regardless of your level of debt, if you have any debt at all, it makes sense to pay your debts. This includes credit cards, car loans, home mortgages, and any other arrangement in which you need to pay money to someone over a period of time. If you have a student loan, you might make the biggest difference for the economy by paying it back a little early. The way things are looking now, a million students may not be able to attend college this fall because of the way the ongoing breakdown of financial institutions is affecting student loan funding. Depending on who you owe your student loan to, the money you repay now might be used to make new loans to current college students later this year.
Most Americans have moderate to high levels of debt. For example, as I wrote recently, the average U.S. house is less than 50 percent paid for. So the question of what to do with a little “extra” money is misleading. The money has already been spent.
Most consumers with no debt are either poor or rich — too poor to get a credit card or car loan, or too rich to need one. Economists believe low-income consumers will spend most of their rebates within a matter of weeks, although as President Bush suggested today, this may not be any new spending, but only enough to “help . . . offset the high prices we’re seeing at the gas pump and the grocery store.” Wealthier consumers are not really expected to notice the rebate payments, so economists don’t expect any extra spending from them.
I’ve seen a series of surveys conducted by trade groups hoping to find that consumers will spend the money on vacations, electronics, cars, and so on. The results are, from the sellers’ point of view, disappointing. According to the surveys, consumers were planning to spend between 10 and 25 percent of the rebate money on new big-ticket items and discretionary purchases, but these surveys were taken before the recent jump up in petroleum and food prices. The actual level of new spending, after consumers fill up their fuel tanks, might be around 5 percent, or $6 billion.
This is what happens when stimulus payments arrive at the same time as an energy price shock (record high oil prices again today) and the lowest levels of consumer confidence in 26 years (measured by the Reuters/University of Michigan consumer sentiment survey). Consumers who are skeptical about the economy can’t be expected to go out and spend freely, but at least the extra money will help them shrug off some of the more gloomy scenarios that might be worrying them. And maybe that’s the kind of economic stimulus we should expect from the current round of stimulus payments.