- • A little more than three weeks ago, the Internal Revenue Service (IRS) began the transfer of USD 106bn in tax rebates to US consumers. Currently almost a quarter of the rebate payments have reached consumers; the remaining transfers should be completed by mid-July.
- • With the rebates being paid from early May, some impact should be visible, if not in May, then in the June data. While there are major uncertainties around the timing and size of the impact of this stimu-lus package, we believe the most likely outcome is that the rebates will provide a significant boost to consumer spending over the coming three to four months.
- • The reacceleration in consumer spending will have a spin-off effect on US industry. While industrial indi-cators are set to weaken further in the next couple of months, the scale-up in demand at a time when in-ventories are very lean is likely to spark a temporary rebound in the manufacturing sector during the au-tumn. Generally, the major bulk of the GDP effect from the rebates expected to arrive in Q3.
- • However, around New Year 2009 the positive impact from the rebates is likely to peter out, resulting in renewed softness in consumer spending, as the underlying economy will remain relatively weak at that time. We do not expect consumers to be on track for a sustained recovery before somewhat into 2009.
- • In the short term, though, it will be crucial to keep track of high-frequency indicators to watch the re-sponse among consumers. This is likely to be a determinant of market sentiment over the summer. If the stimulus package finds traction in the economy it could support some of the current optimism about the economic outlook in the markets. However, if the tax rebates fail to jumpstart consumption in the next few weeks and months this could potentially spark serious concerns.
