February's Refund-Driven Boom


By Rick MacDonald Americans appear to be getting more money back from Uncle Sam than experts had figured. Surprisingly, individual tax refunds are running at a record rate in 2005. In February alone, refunds have added an estimated $6.5 billion to household cash-flow over 2004. And that could be good news indeed for the U.S. retail sector.

Why? Well, if only 25% of each refund check is spent in February, refunds would add 0.5% to the government's

retail sales growth figure for the month. Our guess at Action Economics is that as much as 50% of February refund payments are spent over a two- to three-month period. It might be reasonable to infer that the data suggest a notable upside for retail sales and consumption for February in particular, and the first quarter overall.

Weekly individual refunds have outpaced those of 2004 for the last three weeks by a fairly sizable margin. IRS data released on Mar. 2 confirm that the dollar amount of refunds sent to taxpayers is surprisingly strong, vs. last year's brisk pace. Total refunds through Feb. 25 were $93.3 billion, up $6.5 billion (7.5%) over the same period last year. The average refund is $2,436, up $206 (9.2%) over last year. The total amount of direct deposits surged 11.7%, to $78.9 billion, with the average direct-deposit refund equaling $2,713.

RISING GAUGES. A February refund-related pop in spending has been supported by the surprising strength in recent chain-store sales. Retail behemoth Wal-Mart (WMT) indicated on Mar. 3 that same-store sales rose an impressive 4.1% in February, above its earlier guidance of 2% to 4% growth for the month, while the outfit's overall sales surged 11.1%. The Bloomberg same-store sales index jumped 4.4%, the strongest gain since last May.

Much of the strength appeared to come in the latter part of the month. The most recent Redbook survey of retail activity saw a jump of 2% on a month-to-date basis, compared to 0.7% the previous week -- a huge increase to come so late in the month. The monthly gain appears set to be the largest since April, 2003. On a year-over-year basis, the Redbook survey surged a hefty 7.6% -- one of the largest weekly gains of the last decade.

Meanwhile, another key retailing gauge, the most recent ICSC-UBS survey rose a hefty 1.5%, which left a 3.3% gain for the week on a year-over-year basis. Based on an aggregate of the two surveys, sales have accelerated to the strongest pace since early 2004.

This strength in refunds and recent spike in chain-store data point to notable upside for retail sales in February. The data have boosted our retail sales forecast for February to a rise of 1% (both with and without autos), with strength also due to firm food and gasoline prices. The strong trend in refunds, however, does suggest some downside risk to the Treasury deficit figure for February.

ABOVE AND BEYOND. We believe the refund period will be front-loaded, with March and especially April revealing a drop from year-ago levels as we approach the Apr. 15 tax-filing deadline. But the impressive strength in February's refund data suggests that it will be difficult for the refund season overall to show much of a drop from 2004.

This is surprising, given that strong refund payments in the last three years appeared related to both the weak economy and three successive rounds of tax-law changes that, historically, provided a temporary boost to refunds. Nevertheless, the 2005 refund period will probably show about $5 billion less in individual refunds than the record total of $200 billion for 2004.

Overall, we expected a slowdown in refunds in 2005, vs. the record-year of 2004, but it has yet to occur. The surge in refunds this February, combined with strong evidence of a recent pickup in the labor market, is adding to the list of reasons that all the February economic data, from employment to income, spending, and inflation, could come in ahead of Wall Street's expectations. MacDonald is global director of investment research and analysis for Action Economics


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