The first round of economic stimulus checks gave a boost to personal incomes in April but a huge question remains: Will people spend the checks quickly enough to keep the economy afloat?
The Commerce Department reported Friday that consumer spending barely budged in April, rising a tiny 0.2 percent, and income growth was just as weak, increasing a similar 0.2 percent.
The growth in incomes, held back by four straight months of jobs losses, would have been just 0.1 percent had it not been for the first wave of economic stimulus payments that the government started sending out April 28.
The impact on incomes should be even larger in the May and June reports, reflecting the bulk of the payments. The Treasury Department reported Friday that so far 57.4 million payments have been made totaling $50.04 billion, nearly half of the $106.7 billion that will be disbursed this year to 130 million households.
The checks are the centerpiece of a $169 billion stimulus package that Congress passed at President Bush’s urging in February with the aim of jump-starting the stalled economy. Analysts said whether they keep the economy out of a recession will depend on how fast people spend the money.
“It will be impressive if consumers can manage to hold on given all the headwinds they are facing,” said Mark Zandi, chief economist at Moody’s Economy.com. “Nothing is going right. Jobs are down, the stock market is wobbly, home prices are plunging and gasoline prices are at record highs.”
All the problems have pushed consumer confidence to recessionary levels. The Reuters/University of Michigan survey of consumer sentiment dropped for a fourth straight month in May, hitting a 28-year low of 59.8, down from a reading of 62.6 in April. The May level was the lowest since June 1980, when Jimmy Carter was in the White House and consumers were being battered by a recession and soaring gasoline prices.
Despite worries that consumers may end up using their stimulus checks to pay off credit card debt rather than spending the money to give the economy a boost, analysts said they believed that about two-thirds of the money will get spent this year, enough to keep the overall economy, as measured by the gross domestic product, in positive territory.
The government on Thursday revised its estimate of first quarter GDP growth up to a rate of 0.9 percent, slightly better than the 0.6 percent original forecast. While many economists had believed that the economy would slip into negative territory during the current April-June quarter, the modest growth in consumer spending in April and hopes of better figures going forward are causing analysts to revise their estimates upward.
“So far, the economy is proving more resilient than we gave it credit for,” said David Wyss, chief economist at Standard & Poor’s in New York, who said GDP growth could come in around 0.5 percent in the current quarter and then rebound to around 2 percent in the July-September quarter, as consumers spend their stimulus checks.
But Wyss and some other analysts cautioned that the boost in economic activity could be short-lived, only delaying a full-blown recession into early next year.
“There is considerable risk that the tax rebates will only put a Band-Aid over a large and growing wound to consumer sentiment with a rising possibility of a sharp pullback in spending later in 2008 or in early 2009,” said Brian Bethune, chief U.S. financial economist at Global Insight.
The 0.2 percent rise in personal incomes in April was the weakest gain since a 0.2 percent rise in January.
Private wages and salaries fell at an annual rate of $18.2 billion in April, the biggest setback in a year. Businesses have been cutting jobs for four straight months, with analysts forecasting a fifth month of job declines when the government reports next Friday on labor market conditions in May.
The 0.2 percent rise in consumer spending followed a 0.4 percent increase in March. Increases in recent months have largely reflected the big surge in energy costs and, to a lesser extent, higher food prices. Excluding inflation, consumer spending would have been flat in April.
Consumer prices, measured by an inflation gauge tied to spending, rose by 0.2 percent, down from a 0.3 percent rise in March.
The personal savings rate, the amount of spending compared to after-tax incomes, held steady at 0.7 percent in April, the same level as in February and March.