Tax Refunds Get Consumers Back In The Shops

John Maynard Keynes once wrote that if you want to bet on which contestant will win a beauty contest, don’t try to guess which girl is the prettiest. Instead, try to pick the girl the judges will decide is the prettiest.

So, too, with the economy. We have to guess not only which green shoots, if any, are likely to grow into sturdy oaks, but what decision the judges — Federal Reserve Board chairman Ben Bernanke, Treasury secretary Tim Geithner, and White House adviser Larry Summers, among others — will make about the durability of any emerging recovery. And, having decided, what next steps they will recommend to the president.

Here is the good news that is the topic of their head-scratching and discussion as they dig into the components of the reported 6.1% drop in GDP in the first quarter of 2009 to learn just why economists at Goldman Sachs say the report is “supportive of future growth despite the deep decline”.

Consumption, generally considered to be a lead indicator, increased by 2.2% in the first quarter (although March was a bit weak) as consumers went shopping with $200 billion in tax refunds (up 30% from last year) and $100 billion in payments to pensioners, and other transfer payments. Still to come are a $250 one-off payment to all pensioners, and the impact of the Making Work Pay tax credit, which will reduce taxes taken from pay cheques of all workers other than the “rich” (workers earning more than $200,000 and families earning more than $250,000).

More important, because it is an indicator to which Summers attaches considerable importance, inventories of unsold goods are down, which suggests that it won’t be long before retailers and others have to restock, giving manufacturing a boost.

The outlook for investment in capital goods also seems to be brightening. Orders for such products designed to last more than three years — appliances and computers, for example — rose 4.3% in February and 1.5% in March (excluding volatile aircraft orders and defence spending), suggesting that we have at least reached the end of the precipitous declines of earlier months.

Then there is the fact that first-quarter GDP was pulled down by a surprising drop in spending by the federal government. Surprising because Congress has approved the president’s enormous stimulus package and, late in the week, his $3.5 trillion budget package — a gift to Barack Obama from Democrats in Congress eager to celebrate his first 100 days in office.

It seems that the president’s critics were right when they argued that the stimulus package was less designed to give the economy an immediate boost than to fund Obama’s plans for greater government participation in the healthcare, energy and education sectors. And when they were sceptical of the ability of the states to put the funds to immediate use on projects that governors claimed were “shovel ready”.

But the trickle of funds will soon increase, if not into a flood, then into a flow of money into infrastructure and other projects — it has taken the states longer to get workers digging on their “shovel ready” projects than predicted. Only 2 of 16 states have agreed how to spend all the money they have been allocated for transport infrastructure projects, and only three states have thus far submitted applications for funds to enable them to avoid laying off firemen, teachers and police.

Some experts are saying that when the stimulus spending does begin to hit the streets, it will in the end freeze out private-sector spending and reduce long-term growth. But there seems little doubt that pumping $787 billion into the economy, along with other measures being taken by the Fed and the Treasury, will begin to boost the economy sooner rather than later. That should produce positive growth in the current quarter — growth that sceptics believe will prove to be a false dawn.

Then there is the housing sector. Until recently, the only green shoots were of weeds springing up on the lawns of repossessed and abandoned properties. Sales of existing homes fell in March, by 3%, and prices continued to fall, reaching levels 12.4% below March 2008. Inventories of unsold homes remain high. Almost half of all sales are of repossessed properties at knock-down prices. We do not yet know how many more such properties will hit the market if the banks end their foreclosure moratorium. And we cannot estimate how many of the 683,000 vacant homes that are not on the market will be offered for sale in the coming months.

Still, mortgage interest rates are at historic lows (4.73% for 30-year loans), sales of existing homes have been more or less stable for six months, sales of new homes declined by only 0.6% in March, the supply of unsold homes is down to

(a still-high) 9.8 months from a peak of 11 months, and government programmes to reduce repossessions have yet to make themselves fully felt.

Finally, several financial institutions feel sufficiently strong to want to write cheques to the government, repaying any bailout funds they received and, not incidentally, removing government curbs on their activities — read, pay such bonuses as they feel necessary to retain productive personnel. That their executives are shocked, shocked at the reluctance of the Treasury to accept repayment, and get the government out of the banking business, is perhaps the best demonstration we have had of the naivety of this group of generally inept managers of the nation’s lenders.

These are the tea leaves that the judges of the economy’s health are attempting to read. Bernanke has decided on steady as she goes, and will continue to print money with which to buy securities, adding to the money supply. Geithner will pump capital into such banks as fail the stress tests — seem unable to meet a more severe crisis — and into insurance companies, car companies and any other enterprises that it deems too big or too unionised to fail. Summers will continue to muse. Look for little or no change in policy for the medium term — or until next Friday’s jobs report is published.