Is the Rebate Rebound Losing Steam?

S&P economists say consumers spent the rebates faster than expected in the second quarter

by David Wyss and Beth Ann Bovino From Standard & Poor's Equity Research

The tax rebates have boosted consumer spending in recent months, but signs suggest the impact is beginning to wear off. Consumers spent the rebates more rapidly than expected in the second quarter, giving a boost to non-auto sales, but chain-store sales data suggest that because the sales came rapidly, they also will be over more quickly.

Sales were up 2.6% on a same-store basis in July, about in line with expectations, but retailers are concerned that August sales will drop off. Apparel, furniture, and department stores were again the weak points, with teenage apparel especially weak. This is surprising going into the back-to-school shopping season and could presage bigger problems for the sector in August and September.

Discounters did well, as buyers traded down to less expensive stores to save money. However, many discounters also sell gasoline, which might distort their sales figures. The government's retail sales report for July, scheduled for release on Aug. 13, needs to be watched closely.

Ups and Downs

Personal income rose a meager 0.1% in June after a 1.8% May surge. The swing reflects the timing of stimulus payments, as transfers jumped 10.4% in May and dropped 1.1% in June. We expect a further drop in July. The saving rate jumped to 4.9% in May, as the checks weren't spent immediately, and dropped to 2.5% in June. Some negative rates are likely in coming months as the stimulus payments leave their temporary homes in bank accounts.

Consumer spending rose 0.6% in June, just keeping up with inflation after a solid May gain of 0.8%. Consumers are not cutting back on other items despite the rise in energy costs. The impact of the stimulus payments is to offset the drop in spending that would otherwise have been caused by higher energy prices, but the data suggest that the money is being spent a bit more quickly than our original estimates and that the stimulus bill is having its desired impact.

Car sales dropped to a 15-year low of 13.2 million units (annual rate) in July, down from 13.6 million in June and 16.1 million in 2007. High gasoline prices and an uncertain economy are reducing car sales. Driving is down 2.4% from a year earlier through the first five months of 2008, so people might not need to replace vehicles. For the sixth month in a row, manufacturers sold more cars than light trucks as buyers moved to more fuel-efficient vehicles. The Big-Three U.S. auto manufacturers continued to lose market share, but even Toyota (TM) and Honda (HMC) saw sharp sales drops.

Borrowing accelerated in June, with consumer credit outstanding rising $14.3 billion (a 6.7% annual rate). We had been expecting some acceleration of consumer borrowing to offset the drop in real-estate-secured lending and were surprised at how moderate the increases were in the first five months of the year. The June data could represent catch-up. Particularly surprising was the $8.9 billion (6.6%) rise in nonrevolving debt, which is dominated by car loans.

Given the sharp drop in car sales in June, we had anticipated a small number. The rise might reflect the shift away from auto leasing, with more of the buyers taking out loans rather than leases. If so, its importance is negligible because it reflects only a shift in financing type.

Wyss is chief economist for Standard & Poor's in New York . Bovino is a senior economist for Standard & Poor's.