ECONOMY:
 

Rebates: No big deal for stores

Economists dismiss the tax stimulus proposal, saying it's unlikely to save retailers from the weakest sales growth in 6 years.

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By Parija B. Kavilanz, CNNMoney.com senior writer

How long would it take for a rate cut by the Fed to stimulate the broader U.S. economy?
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NEW YORK (CNNMoney.com) -- With 2008 expected to show the weakest growth for retail sales in years, Americans sorely need some incentive to keep shopping.

But economists say President Bush's proposed tax stimulus - unveiled last week - would merely provide short-term relief for consumers without curing the problems in housing, credit, energy and the job market causing an economic pullback.

Bush's plan would give refunds of up to $800 for single taxpayers and $1,600 for families. Congressional Democrats are also expected to come up with a stimulus plan, and the two sides have talked about a quick compromise to get the economy moving.

"It [tax stimulus] is a Band-Aid that's needed for now, but it won't get consumers out of the woods," said Michael Niemira, chief retail economist with the International Council of Shopping Centers (ICSC).

The National Retail Federation's (NRF) economic forecast calls for a 3.5 percent increase in annual retail sales in 2008. While that's above the 3 percent annual average, it would be the slowest pace of growth in six years.

Given that consumer spending fuels 70 percent of the nation's economy, the trade group maintains that the fastest way to rev up the economy is through the consumer.

"Quick enactment of legislation to put dollars back in consumers' pockets would fuel consumer spending and create additional demand throughout all sectors of the nation's economy," NRF's CEO Tracy Mullin said last week in response to the stimulus announcement. "We believe such legislation could be the boost our economy needs to set it on an upward path once more."

Niemira and others only partially agree with Mullin's argument.

"Any extra money that you give consumers at this time will help [spur spending]," he said. "But the typical view is that any temporary tax relief is not as effective as a permanent tax relief."

In Niemira's view, consumer spending is threatened by the credit crunch, the housing meltdown and higher energy prices.

"Unless this is corrected, the tax stimulus is just buying time," he said.

The Bush administration has gone the tax refund route before. In 2001, taxpayers were given payouts of between $300 and $600 in an attempt to boost a sluggish economy.

"It did soften the downside to the economy that year, especially after (the) 9/11 (attacks)," Niemira said.

Discount stores, warehouse clubs, dollar stores and other value-price retailers benefited from the extra spending money as more mid-income consumers traded down to these stores.

According to the NRF, retail sales grew 3.2 percent to $1.8 trillion in 2001. Sales during the key November-December holiday shopping months - a period that accounts for almost half of retailers' annual profit and sales - rose 3.6 percent to $368 billion.

However, the refunds provided absolutely no boost to retail sales the following year, when sales slowed to 3 percent growth. Holiday sales in 2002 dropped to an anemic increase of just 1.3 percent versus the prior year.

While Niemira sees some short-term positives, a stimulus plan could create other problems long term.

"This is a Catch-22 for the government," Niemira said. While something has to be done to bail out consumers, he said these rebates will also add to the national debt.

The total stimulus of about $150 billion will boost the national debt, but the impact will likely be marginal if this is only a one-off incentive, said Michael Englund, chief economist with Action Economics.

"If the stimulus package can boost consumer confidence and cause recession fears to dissipate, it could also boost the dollar and potentially interest rates," he said.

Richard Hastings, economic adviser with the Federation of Credit and Financial Professionals, was more critical of the stimulus proposal, calling it a "comfort patch."

"Unfortunately we don't have the same context now that we had in 2001 to make this an effective stimulus plan," Hastings said.

The big problem in his eye is inflation. "Health care costs are much higher than they were in 2001," he said. "Energy prices, food and services costs are much higher today."

Hastings believes the nation's economic problems run much deeper than how much people are spending at the mall.

"If the government is trying to prevent a recession with this plan, it's the silliest thing to do," he said.  To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.