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VOL. 123 | NO. 107 | Monday, June 2, 2008

Soaring Cost of Living Saps Consumers’ Early Refunds

By DAVE CARPENTER | AP Business Writer

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CHICAGO (AP) – Many Americans allowed themselves to fantasize about large-screen TVs, European vacations and other luxuries when they learned of the federal rebates they’d be getting this spring and early summer.

Or maybe – shh, don’t tell the president – they’d pay off a credit card or set the rebate aside for a big purchase in the future, notwithstanding Washington’s intentions that they pump it immediately into the flagging economy.

But reality has interfered, in the form of ever-climbing food bills and $4-a-gallon gasoline. While some consumers got their dream TVs, as confirmed by a spike in April retail sales in anticipation of the economic stimulus payments, day-to-day living costs have sopped up the checks for many other early recipients and spoiled their rebate fantasies.

Based on a small but broadly diverse group of consumers who tracked their rebate spending in detail for The Associated Press, there was no mass rush to the malls for shopping sprees after the payments started showing up in bank accounts in significant numbers in May. The greater economic ramifications may not be seen for months.

All told, 131 million households are to receive a total of $110 billion by the time the last payments are doled out in mid-July. What people do with them will help shape the direction of the sputtering economy.

The last time Washington undertook such a program to combat an economic slowdown, taxpayers got rebates of $300 or $600 in the summer and early fall of 2001. The eight-month recession was over by November, but it’s not clear how much the payouts helped. The amount that people actually spent – excluding saving money, investing or paying down debt – was lower than many economists expected, although estimates vary so widely an exact total is hard to peg.

This year’s program provides more money, aimed at delivering a bigger shot of adrenaline to the economy by inducing people to buy items they didn’t otherwise have the cash for.

Most individual taxpayers are getting checks of up to $600, while couples receive $1,200 plus $300 for each eligible child younger than 17. People earning too little to pay taxes but at least $3,000, including seniors whose only income is from Social Security, get $300 if single or $600 if a couple. And there are no payments for the wealthy: The amount starts to phase out for those with incomes more than $75,000, or $150,000 for joint filers.

Based on economists’ preliminary assessments, and echoed by the AP sample group of more than two dozen people, Americans are not hesitating to spend the money – but more for essentials than was anticipated. It’s easy to understand why: Gas prices are up more than 30 percent since the rebate check amounts were first announced and food prices are projected to increase 5 percent or more in 2008.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank, thinks at least half the rebate money may go toward energy costs alone.

“It’s not going to give you the bang for the buck as originally envisioned,” he said. “The odds of it having a longer-lasting impact on the economy are less. ... People were not planning to use so much of it on energy and food.”

Diane Swonk, chief economist for Mesirow Financial in Chicago, also estimated that consumers will spend more than half of the rebates – but much of it on the higher cost of living, citing evidence of a “very stressed consumer.”

That would be dramatically higher than what they signaled in an Associated Press-Ipsos poll in February, when only 19 percent of respondents said they would spend their rebates. Some 45 percent said they planned to pay off bills, 32 percent said they would save it or invest it, and 4 percent said they would donate it to charity. Consumers in the past have tended to spend significantly more than they told pollsters they thought they would.

Moderately affluent Americans, too, are showing increasing signs of economic strain. Swonk said more and more households are shopping for groceries at big-box retailers rather than their local grocer, not going out to movies as often, or watching regular TV instead of rented DVDs or on-demand movies.

She said economic growth won’t be affected by where people spend their rebate checks – but consumer confidence will, which can influence the longer-term outlook. Over the long haul, spending on staples won’t provide the boost the government hoped for.

Associated Press writers Becky Bohrer in New Orleans; John Curran in Montpelier, Vermont; Sandy Shore in Denver and Laura Wides-Munoz in Miami contributed to this report.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

PROPERTY SALES 97 418 8,253
MORTGAGES 112 508 9,293
BUILDING PERMITS 194 1,059 18,126
BANKRUPTCIES 46 208 5,367