By  on April 21, 2008

Consumers may not be in a hurry to spend their tax rebate checks at the mall.

Amid concerns about inflation, job cuts, the credit crunch and other economic woes, many Americans are likely to use the money for everyday needs, experts said.

"We have said repeatedly that the risks are that much of the $117 billion tax rebates between May and August will be saved or used to pay down debt, as opposed to new spending," Merrill Lynch economist David Rosenberg said. "But the bottom line is that even if 20 percent is put into the real economy, there is still going to be some positive boost to [gross domestic product] growth, which will likely be felt most in the third quarter."

Given that forecast, Rosenberg said a 5 percent annualized disposable income boost is nothing to sneeze at. And he researched how people spent their 2001 rebates, looking at the economic and credit landscapes, then and now.

The 2001 rebate exerted its maximum impact in July and August, Rosenberg said. The category leaders then, on an annual rate basis, were movies, computers, pharmaceuticals/sundries, books and apparel, particularly women's. Rounding out the top 10 were electronics, kitchen appliances, restaurants and toys. Neither cars, home improvement, furniture, beauty salons nor taxi cabs made the top 10.

The money was spent on so-called "small stuff," a group of cyclical items that was put off in the early stages of the recession: Game Boys, toaster ovens, iMacs and jeans, he said. Movies and books made the top 10 because they are activities that divert attention from recession concerns.

This year, the expectation is that no consumer sector will be spared. Even luxury consumers might pull back on their spending.

Pam Danziger of Unity Marketing, a consulting firm, expects the 2008 Economic Stimulus Package to have little effect on spending. A new survey conducted by the company found that only 11 percent of luxury consumers who expect to receive rebate checks plan to shop for splurge items.

Most, or 26 percent, plan to save their rebate checks, the study said. Another 16 percent of those surveyed said they would invest the money, while 27 percent said they would use it to pay down debt."The affluent luxury consumers are the 'heavy lifters' when it comes to consumer spending," Danziger said. "The top 20 percent of households based upon income, which corresponds to Unity's survey sample, spends about twice as much as the typical U.S. household across the board. When they choose to hold back on their spending, the effects are felt far and wide."

A far more meaningful economic stimulus for the U.S. economy would have been a reduction in the price of gasoline, she said.

The survey was conducted between April 7 and 11 among 1,258 luxury consumers with incomes of $100,000 or more. The average income was $173,400 and the mean age of those surveyed was 45.9 years. About 60 percent expected to receive a rebate.

"I'm not surprised by the results," said Walter Loeb, a retail consultant and former Wall Street retail analyst.

His rationale for the lackluster spending at retail has to do with the paucity of jobs. "When there's not much in the way of job creation, don't expect much of a turnaround at retail," he said.

Loeb, who is usually optimistic about retail and consumers' willingness to spend for special occasions, acknowledged his uncharacteristic soberness about the economy.

"I expect no more than 40 percent of the rebate will be spent at retail stores," he said. "Most of the rebate check will be spent on gasoline for the car and paying down mortgages. More than half of the rebate won't be going into the retail sector."

He explained that the lack of spending will result in retailers cutting orders or conducting more store promotions. "They are going to prefer being in a position where they underbuy rather than expose themselves to higher levels of markdowns," Loeb said.

How bad will it get?

Last week a Securities and Exchange Commission filing on Tuesday by Talbots Inc. revealed that Bank of America canceled its $130 million letter of credit as of April 8. HSBC reduced its letter of credit to $60 million from $135 million and will phase out financing entirely by Aug. 8.

Talbots said its current available lines of credit will be sufficient to pay for working capital needs under its 2008 operating plan. And J.C. Penney last month slashed first-quarter earnings projections to 50 cents a share, down from the 75 cents to 80 cents previously expected."Consumer confidence is at a multiyear low," Myron "Mike" Ullman 3rd, chairman and chief executive officer of Penney's, said last month. "J.C. Penney counts half of American families as its customers, and they are feeling macroeconomic pressures from many areas, including higher energy costs, deteriorating employment trends and significant issues in the housing and credit markets."

The retailer said during a two-day analyst meeting in New York last week that it will renovate 20 stores this year, instead of the originally planned 65 sites. And Penney's will open 36 stores, instead of the planned 50, to save $200 million in capital expenditures.

Some are hoping for consumer optimism by yearend — after the presidential election — when year-over-year comparisons will be easier.

But there were two other possible factors that could curtail further consumer spending. One is that consumers might be maxed out on their credit cards, with no where else to tap for spending.

The current consumer-led recession began in October, Loeb said, noting that concerns on the jobs front and other higher overall costs likely had a major impact on the shift in the value-sentiment exhibited by many shoppers last year.

It is a trend that could leave many retailers out in the cold throughout 2008.

According to the How America Shops 2008 survey conducted by WSL Strategic Retail last year, the U.S. is in the midst of a perfect storm of high gas prices, a depressing housing market and a credit crunch caused by the subprime mortgage mess. The perception among consumers is that they feel the need to be more prudent than ever.

While the ability to control mortgage payment costs and grocery and energy bills is limited, consumers can at least try to save money on everything else.

So if values are more important than brands, then retailers can expect a change in the traditional brand desires. The WSL survey found that as many as 38 percent of women and 32 percent of men agree that "I used to care about wearing designer brands, but I don't anymore." One key difference now is that some consumers, over a third of men and women (37 percent of women and 36 percent of men), said, "I'll buy a preowned product if it lets me get a brand name that I couldn't afford."The survey also said that the "signs of anarchy" are the strongest in the mortgage-heavy middle class. This is the group that in good times has high aspirations for trading-up brands and retail shopping experiences. With the latest economic changes, the study found that women among lower-middle and upper-middle income households earning $75,000 to $100,000 are making fewer shopping trips within the week, down to 3.7 from 4.4 in 2006, when WSL last conducted the How America Shops survey. Higher-income women with incomes of more than $100,000 made slightly more trips, increasing to 4.6 from 4.4 in 2006, presumably because the more affluent are less affected by gas prices.

As for what women and men buy, spending has increased for food and pet supplies. But the catch is that consumers are spending more on food because prices are rising, not because they're buying more items, according to WSL.

Retail analyst Deborah Weinswig of Citi Global Markets said that "food retailers will continue to pass on food inflation to consumers."

She noted that a large increase in Citi's tracking index for cereal and bakery products was partly offset by a downturn in the index for dairy products. She also cited U.S. Agriculture Department data expecting the consumer price index for food at home to increase 4 to 5 percent this year, up from its previous forecast of 3.5 to 4.5 percent.

Based on the USDA data, the biggest price inflation category is expected to be fats and oils, up 7 to 8 percent. Cereals and bakery products should see a price increase of 6.5 to 7.5 percent, followed by the nonalcoholic beverages category rising 3.5 to 4.5 percent. Consumers can expect a 3.5 to 4.5 percent gain in the costs of fresh fruits and vegetables.

From December through March, at-home food expenditures were 53.6 percent of overall food expenditures, slightly higher than the 53.1 percent it represented in all of 2007.

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