Consumer Spending to Hit a Pothole With Tax Refunds Still in the Mail
Legislation aimed at preventing fraud is delaying U.S. tax refunds and is likely to crimp consumer spending by as much as $21 billion this month, according to Goldman Sachs Group Inc.
The provision in the Protecting Americans from Tax Hikes Act passed by Congress near the end of 2015 will postpone funds remitted to between 25 and 30 million U.S. households (the majority of which are lower- and middle-income) via two federal tax credits until the week of Feb. 27, economist Spencer Hill wrote.
These groups tend to have a higher marginal propensity to consume — that is, they're more likely to spend additional income than wealthy households — so this delay is likely to have an immediate and meaningful impact on purchasing activity.
"Just two weeks into the tax filing season, tax return statistics from the IRS and U.S. Treasury are already showing a meaningful slowdown," writes Hill in a Feb. 8 note to clients. "Because a significant portion of households spend their income almost immediately — due to credit constraints or other factors — the refund delay could result in a pothole in consumer spending in February."
Hill estimates that February's tax refunds could be cut in half relative to 2016. The hit to personal-consumption expenditure this month could reach nearly 2 percent, says the economist, while cautioning that any weakness would be short-lived and reversed after households eventually receive the refunds associated with the Earned Income Tax Credit and Additional Child Tax Credit.
Evidence of the lag is likely to be visible in February and March consumer-spending data as well as potentially in some companies' first-quarter earnings reports, he added, though not in the monthly personal-income figures compiled by the Bureau of Economic Analysis.