Everything is bigger in taxes: Tax refunds and consumer spending

Summary

• The U.S. consumer faces a wave of challenges in 2022. Persistent inflation combined with a less supportive policy environment will take much of the wind out of the sails for consumer spending this year.
• But, it's not all doom and gloom for the consumer. Job growth remains strong and household balance sheets are in relatively good shape.
• An underappreciated near-term tailwind for the consumer, in our view, is robust federal tax refunds. The average tax refund is up more than 12% compared to last year and is about 13% higher than the average refund over the past five years.
• Refunds are higher on average due to some federal fiscal policy stimulus that is still flowing. In short, tax season affords households an opportunity to take advantage of any COVID relief benefits they may not have received in 2021.
• The tax filing season is far from over, and as we get closer to the April 18 filing deadline, these data could change. That said, filers who are owed a refund tend to file earlier than individuals who owe the government money. The average refund size might drift lower in the coming weeks, but we doubt it will be a major decline.
• Real personal spending data has been noisy over the past few months, but through February the level of real consumer spending is 0.3% ahead of where it was in November—an impressive feat amid raging inflation, the Omicron COVID wave and less generous fiscal support.
• Higher refunds may have provided a bit of a buffer to spending in February, and this boost could continue through March and April. We forecast real personal consumption grew at about a 3% annualized pace in the first quarter. If realized, this would mark the fastest pace of consumer spending growth since Q2-2021.
• But while refunds are a near-term tailwind for consumption, the effects will only be temporary. The one-time inflow from an outsized refund is no match for persistent price pressures. Higher inflation has pushed real disposable personal income significantly below its pre-pandemic trend, and this presents a growing concern for future spending growth.
• Maintaining the current pace of real spending growth will be more challenging in the second half of the year, and households likely will need to lean on their balance sheets to sustain spending growth.

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