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Politicians know how to do one thing well: hand out money.
With a possible recession looming, politicos in Washington, D.C., are rushing through a tax-rebate package twice as big as any cash giveaway in the past four decades.
Which companies should expect a slice of this $100 billion pie? Though a $1,200 check may bring sellers of flat-screen TVs to mind, history shows most Americans are likely to spend the largest chunk on basics such as food and clothing.
That's good news for Wal-Mart Stores (WMT, news, msgs), the nation's largest retailer, and others like Target (TGT, news, msgs) and Kohl's (KSS, news, msgs).
Lower-end retailers like these, along with restaurants, could get a $66 billion revenue boost in the third and fourth quarters if past consumer behavior is any guide. Wal-Mart alone could see $4 billion to $5 billion from the rebates in just the third quarter.
The push is on
President Bush is pressing for fast action, but Congress still has to agree on a plan.The key House plan would offer rebates of up to $600 for individuals and $1,200 for couples who filed tax returns jointly, plus $300 per child. The rebates would be phased out for individuals with adjusted gross incomes of more than $75,000 and couples with more than $150,000. The theory: People who earn less are more likely to spend it and help the economy.
- Talk back: What would you do with a tax rebate?
The Senate's plan would offer somewhat less money, and the income cutoffs would be higher.
Checks could hit the mail by May or June. Consumers likely would spend more than half of the money in a couple of months on things like groceries, clothing and eating out. They would also probably catch up on delayed car repairs and pump some money into slot machines.
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The rebates and recent Federal Reserve interest-rate cuts "should keep the consumer spending right through the spring and into the summer," says economist Ed Yardeni, the president of Yardeni Research. "I'm sure marketing departments are already coming up with ways to get those rebate checks spent in their stores."
Together with lower energy prices and an increase in mortgage refinancing, the rebate checks should help casual-dining restaurant chains such as Texas Roadhouse (TXRH, news, msgs), The Cheesecake Factory (CAKE, news, msgs), Luby's (LUB, news, msgs) and CBRL Group (CBRL, news, msgs), which runs Cracker Barrel.
AutoZone (AZO, news, msgs) and Advance Auto Parts (AAP, news, msgs) should get a boost. So should casinos that welcome budget gamblers, like MGM Mirage (MGM, news, msgs) and Pinnacle Entertainment (PNK, news, msgs).
Restocking the pantry, filling the closet
After the 2001 tax rebates, consumers mostly bought food and nondurable goods such as clothing, according to a study cited by the Congressional Budget Office. Spending on food went up 2.7% and outlays for nondurable goods went up 3.2% soon after checks went out.Macroeconomic Advisors, an economics-forecasting shop based in St. Louis, predicts this round of rebate checks could increase consumer spending by 4.4% in the third quarter, based on its analysis the past three times checks were handed out, in 1975, 2001 and 2003.
"Consumers will restock their pantries and buy clothing and shoes, the things that they passed on at Christmas," predicts Lauri Brunner, a retail-sector analyst with Thrivent Financial for Lutherans. "That's what happened last time. Durable goods like home furnishings and big-ticket items were not as big a beneficiary."
Expect the checks to have a big, albeit temporary, impact on consumer spending, despite what skeptics say.
Families spent 20% to 40% of their 2001 rebates in the quarter they got the money and about two-thirds by the end of the next quarter, according to the study cited by the Congressional Budget Office.
Continued: Impact would be amplified
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