ROI-Bumper US tax refunds soften energy blow. McGeever: But not for much longer

Tax deadlines in the U.S. are April 15th. This date is often met with both anticipation and dread. The filing process can be a chore, but the possibility of a windfall refund is also exciting. This year's refund may be much larger than normal, and the timing could not be more perfect.

Goldman Sachs economists estimate that tax refunds will be 17% higher this year than last, which would mean a windfall of $50 billion for consumers by the end May compared to the same time last year.

The fuel price spike that followed the Iran War two months ago should provide a boost to the economy and consumers.

Last month, it appeared that consumers were already preparing to receive their refunds to cover the record rise in gas prices. The figures released on Tuesday show that retail sales rose more than expected in March.

The Atlanta Fed, citing this resilience, increased its GDPNow model's estimate of the first-quarter rate of growth from 0.9% to 1.2% annualized - the only upward revision for a whole month.

The upturn is small, but welcome. The consumer outlook was relatively bright at the beginning of the year. However, the Iran War has dimmed it significantly and forced growth forecasts be cut.

How long will any boost based on refunds last?

April is expected to be a strong month for consumer spending. One-time, large refunds tend to be viewed as discretionary money and are spent rather than saved.

This timeline means that the boost will fade as long as energy prices remain high, forcing consumers into dipping into their savings.

SWALLOWING UP REBATES

Morgan Stanley's economists provide a sobering assessment. The economists at Morgan Stanley predict that the average increase in tax refunds can only offset the spike in gasoline prices if this year's average pump price is not more than $3.60 a gallon. This figure is still above $4.00.

The pump will eat up the rebates if prices don't fall sharply and quickly. Oxford Economics says that despite the windfall of rebates, consumer spending growth could be low in the second quarter, possibly dipping below 1%.

Goldman economists are also not optimistic that consumers will be able to endure higher gas prices before they cut back on their spending.

According to their baseline scenario, Brent crude will drop to $80 per barrel by the end of the year - from around $100 since the outbreak of the war on February 28 and $70 the previous day - causing a $70bn annualized hit to consumers. This headwind, at current prices is estimated to be $140 billion annually.

Not So Fast

Hold off calling for the U.S. consumers to capitulate just yet.

The average household's balance sheet is in good shape, particularly with equity prices proving to be so resilient. The 'wealth' effect has been underestimated by those who predicted the end of the U.S. Consumer in recent years.

According to Motio Research, the real household income has reached its highest level since the series began in 2010. This excludes the pandemic-distorted 2020 year.

A consumer'stress index' released on Wednesday by the Kearney Institute shows that 37% U.S. consumers were stressed out about their debts and savings during the first quarter of this year, up from 10% at the end of last year. One persistent trend over the past few years has been the huge disconnect between what consumers say they feel and how their anxiety affects their spending.

The consumers in lower income brackets, however, are more vulnerable because they spend a greater proportion of their incomes on energy. They are only responsible for a small portion of total U.S. expenditure, so headline figures could remain strong even though large segments of the populace are in serious financial difficulty. The bumper tax refunds will delay the increase in pump prices. But, as with all things crisis-related, the question is for how long.

Save the date! On April 23, at 1300 GMT/9 a.m. ET, ROI columnists Jamie McGeever and Mike?Dolan will be joining LSEG in a webinar entitled "Markets Unpacked With Open Interest: Rethinking Safe Havens in Uncertain Times." Sign up here.

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(source: Reuters)