Rebates Could Stave Off Long Recession
WASHINGTON — Despite remarkably quick passage, the economic aid plan and its cash rebates may come too late to prevent a recession this year. For many experts, however, the $168 billion boost to the lagging economy may mean the difference between a short downturn and something much more serious.
The measure that President Bush plans to sign this coming week will send government payments to more than 130 million people. Checks that will start showing up in mailboxes in May range from $300 to $1,200; households with children get an additional $300 per child. Businesses benefit, too, through tax breaks to increase investment spending on plants and equipment.
The tax relief is intended to jump-start the economy. Politicians, worried about a recession in an election year, put aside their normal bickering to speed the proposal through Congress.
Nonetheless, there is debate over how effective it will be. Critics say debt-burdened consumers will use the money to pay bills rather than spending the checks and spurring growth.
An Associated Press-Ipsos poll found that only 19 percent of those surveyed said they planned to spend their rebate checks. Forty-five percent said they would pay off bills, while 32 percent said they planned to invest the money.
Supporters of the proposal said they have faith that people will spend the money when they get it.
"When you ask people what they will do with the money, they often say they will pay off their credit card bills," said David Wyss, chief economist at Standard & Poor's in New York. "People may mean it when they say it, but when you look at what they actually do, most of the money gets spent."
Many economists expect anywhere from two-fifths to two-thirds of the rebate checks to be spent in the first six months, based on past experience.
If that happens, the aid plan will do its job of helping the economy rebound after a prolonged housing slump and a credit squeeze. Analysts increasingly believe the economy has slipped into a recession, the first since 2001.
Global Insight, a private forecasting firm in Lexington, Mass., changed its forecast this past week to project a mild recession in 2008. It predicted the gross domestic product would decline at an annual rate of 0.4 percent from January through March and then at a 0.5 percent rate over the next three months. By one rule of thumb, the economy is in a recession when the GDP declines for six months in a row.
Analysts have downgraded their forecasts based on a string of bad reports signaling that the economy clearly donwshifted at the end of last year. Unemployment took a big jump in December. January saw the first loss of payroll jobs in more than four years.
In addition, activity in the service sector, where most people work, fell sharply in January. Automakers and big retail stores struggled with lackluster sales last month.
"With housing activity and prices yet to hit bottom _ and still falling sharply _ the downturn is now spreading more broadly through the economy. The consumer has long been under stress and is now showing signs of cracking," Global Insight said in announcing its new recession forecast.
Brian Bethune, a Global Insight economist, said the new forecast projects the economy will rebound in the summer and grow at a 3.4 percent rate as the rebate checks give a jolt to consumer spending. As that impact wears off, growth will slow to a still healthy 2.7 percent rate over the final three months of the year, he said.
Other economists see a similar pattern _ and benefit from the rebates.
"This is going to provide a very important and measurable boost to the economy in the second half of this year. It won't forestall a recession, but it will ensure that the downturn is short and mild," said Mark Zandi, chief economist at Moody's Economy.com.
Zandi said he expected this downturn to be similar to the 2001 recession, which lasted eight months.
The unemployment rate rose by 2.5 percentage points back then. Zandi said it will rise by less than 2 percentage points during this period of weakness, going from a low last year of 4.4 percent to a peak of about 6 percent.
The expectation of a short and mild recession is also based on the view that the Federal Reserve will keep cutting interest rates in the month ahead. The Fed aggressively began lowering rates in January.
Economists are raising the possibility that the government may consider a second economic rescue plan this year. For example, Democratic senators had hoped the just-passed measure would have extended unemployment benefits; that idea failed, but they are pledging to keep pushing it.
Many economists believe the government will have to do more to address the mortgage crisis. Defaults are soaring as millions of borrowers with spotty credit histories who got loans find themselves unable to make monthly payments once the mortgages reset to higher interest rates.
Analysts said further quick action by the Fed at the first signs of trouble will be essential, given the problems that have already hit the financial industry and wiped out an estimated $120 billion in capital reserves. As a result, banks will lend less until they replenish those reserves.
Economists said they cannot rule out the chance of a double-dip recession, where the GDP rebounds briefly in response to the rescue plan, only to fall into negative territory again.
"We are not out of the woods yet and the risks remain very high because of the widespread problems in the financial sector," Zandi said.
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MARTIN CRUTSINGER | February 9, 2008 02:12 PM EST |
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