Uneasy Economy Sticker Shock
Amy Sancetta  /  AP
Instead of splurging on a big-screen TV or other indulgence, many readers said they plan to use the money to pay off debt, pay other tax bills or budget for higher expenses like food or gasoline. 
Alison
By Allison Linn Senior writer
msnbc.com
updated 4/28/2008 2:24:35 PM ET 2008-04-28T18:24:35

Over the past year and a half, Shane Gledhill has seen the value of his home drop as his family’s gas budget and grocery tabs have risen. Meanwhile, the construction industry he works in has slowed.

So when the government announced a plan to offer Americans a tax rebate check, the 42-year-old father of two knew exactly what he would do with his money.

“We’ve got to stick that in savings because who knows what’s going to happen? “ Gledhill said. “The last thing I want to do is go out and spend it on something.”

Aiming to help stimulate an ailing U.S. economy, the government is planning to hand out tax rebates to millions of Americans, with the hope that the taxpayers' windfall will go straight into a nearby cash register. But with economic woes mounting, some Americans are feeling nervous about going on a shopping spree.

Instead of splurging on a big-screen TV or other indulgence, many say they plan to use the money to pay off debt, pay other tax bills or budget for higher expenses like food or gasoline. Others say they’d rather stash the money away in case things go from bad to worse.

That’s a gloomy scenario for those who are hoping a burst of consumer spending will help stave off a sharp economic downturn.  But some economists believe that, despite their good intentions, many will change their minds once they actually have that check in their hands.

“Americans have an amazing ability for self-deception, and I have full confidence that they’re going to end up spending the money regardless of what they say they’re going to do with it,” said David Wyss, chief economist with Standard and Poor’s.

Of course, the American economy would benefit in the long term if more people actually did save the money, given that Americans at notoriously poor at saving for a rainy day. But spending the money is expected to provide some immediate relief.

“It’s not a long-term solution; it’s a short-term solution,” Wyss said.

About 117 million families are expected to get the tax rebate beginning in May. It will provide up to $600 per taxpayer, or $1200 per working couple, plus another $300 per dependent child, for Americans who meet certain income requirements.

Mark Zandi, chief economist with Moody’s Economy.com, is expecting that two-thirds of that money will be spent within six months, based on the spending habits he saw the last time Americans got a tax rebate, in 2001. He said spending could be slower this around because the rebate isn’t coming along with other tax cuts, and people also may be grappling with more mortgage debt. On the other hand, the checks will go to more lower-income families this time, and Zandi believes those families are more likely to spend the money.

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“They might take the opportunity to go to the dentist and get a check-up – things that they put off because they just don’t have the cash,” he said.

For many Americans, the added cash could end up being sucked right into the gas tank, especially if gas prices drift as high as $4 per gallon this summer. The tax rebate won’t benefit the economy as much if it is spent at the pump, Zandi said, because a large chunk of the profits will go to producers overseas. But the fact that Americans have that money to spend on gas could still help because it eases people’s overall financial burdens.

“We’re just sort of cushioning the blow,” he said.

On the other hand, Zandi said the economy will be helped if people put the extra cash toward growing grocery bills. Also, those that use the money to pay down credit card debt may also inadvertently help the economy, he said, because they’ll feel more freedom to run up debt again.

The rebate comes as many Americans are already tightening their belts because of rising costs for necessities. Gledhill, who lives in the Phoenix area, said his family has already cut back on things like the cable bill as they’ve seen their discretionary income dwindle. He’s now considering taking the bus instead of driving to work, even though he figures it would add three hours of commuting time.

Jean Rampy, 62, expects that her tax rebate will just go right back into paying household expenses such as gas and groceries. An office manager for a hospice company, Rampy has recently cut back on driving, eating out and spending money on things like clothes and shoes. With the economic situation still uncertain, she couldn’t see using the money to splurge.

“If they are expecting that people are going to go out and put this back into the economy by spending at Wal-Mart or wherever, no, I don’t think so,” said Rampy, who lives in Vicksburg, Miss. “It’ll help the people who get it temporarily … with gas, with food, but only for a couple of weeks or something.”

Wyss said the tax rebate will benefit the U.S. economy the most if people spend it on items made in the United States, or take a domestic vacation. A flat-screen TV will help create jobs, he said, but those jobs may be in manufacturing plants overseas.

From that perspective, David Yockel is just what the economist ordered. The father of three from Bethesda, Md., is planning to put his tax rebate toward helping pay for a trip to Walt Disney World. Yockel, who is 43, was considering taking money out of savings to help fund the trip, and he was happy to have a little “bonus money” to spend.

“It’ll just make it much more stress-free,” he said.

Yockel said he and his wife have strived to keep credit card debt down and generally live within their means, which has helped insulate them to some degree from the current economic problems. Still, when Yockel sees his wife come home with fewer groceries and a higher bill, or watches his parents living on a fixed income amid rising prices, he admits he gets concerned.

“I worry about the country overall,” he said.

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