Honey, I Ate the Rebate

You've already spent your tax windfall on gas and bread.

By Daniel Gross

As we speak, economic stimulus, in the form of about $120 billion in tax rebates, is working its way into America's financial bloodstream. Those taxpayers set up for electronic deposit have already received their cash while those relying on snail mail have started to get checks and will continue to do so through mid-July. For America's retailers, struggling with rising unemployment, inflation, and sluggish sales, this booster shot couldn't have come at a better time. Companies such as Kroger grocery stores have set up programs that permit people to exchange stimulus checks for gift cards with a 10 percent bonus. Other discretionary retailers—apparel, sporting goods, restaurants—are holding out hope that the money will find its way into their registers. After all, when the American consumer has cash, he tends to spend it.

But David Rosenberg, Merrill Lynch's straight-talking chief economist for North America, says it might be different this time. The reason: The chunk of the stimulus package likely to get spent is roughly equivalent to the amount Americans are paying for higher food and gas prices because of inflation. Put another way, you've already spent your stimulus at ExxonMobil.

Here are the numbers. When the president signed the fiscal stimulus into law, gasoline prices were hovering near $3 a gallon. Now they're close to $4 a gallon. Rosenberg says the old rule of thumb is that every penny increase in the price of gas takes $1.3 billion out of the pockets of American households. So he concludes that the higher price of energy is draining about $25 billion out of the discretionary spending pool in this quarter alone. Next, factor in food inflation, which is running at a 9 percent annual rate, compared with the normal 2 percent. Food already eats up about 14 percent of the typical American's household budget. By Rosenberg's reckoning, Americans sticking to their regular diets are paying an extra $25 billion per quarter compared with last year. "The combination of energy and food is draining discretionary spending at a $50 billion quarterly rate," he says.

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