WASHINGTON The first round of economic stimulus checks gave a boost to personal incomes in April, but a huge question remains: Will people spend the checks quickly enough to keep the economy afloat?
The Commerce Department reported Friday that consumer spending barely budged in April, rising a tiny 0.2 percent, and income growth was just as weak, increasing a similar 0.2 percent.
The growth in incomes, restrained by four straight months of job losses, would have been just 0.1 percent had it not been for the first wave of economic stimulus payments the government started sending out April 28.
The impact on incomes should be even larger in the May and June reports, reflecting the bulk of the payments. The Treasury Department reported Friday that so far, 57.4 million payments have been made totaling $50.04 billion, nearly half of the $106.7 billion that will be disbursed this year to 130 million households.
The checks are the centerpiece of a $168 billion stimulus package that Congress passed at President Bush's urging in February with the aim of jump-starting the stalled economy. Analysts said whether they keep the economy out of a recession will depend on how fast people spend the money.
"It will be impressive if consumers can manage to hold on given all the headwinds they are facing," said Mark Zandi, chief economist at Moody's Economy.com. "Nothing is going right. Jobs are down, the stock market is wobbly, home prices are plunging and gasoline prices are at record highs."
All the problems have pushed consumer confidence to recessionary levels. The Reuters/University of Michigan survey of consumer sentiment dropped for a fourth straight month in May, hitting a 28-year low of 59.8, down from a reading of 62.6 in April. The May level was the lowest since June 1980, when Jimmy Carter was in the White House and consumers were being battered by a recession and soaring gasoline prices.
On Wall Street, the Dow Jones industrial average edged down slightly Friday, falling 7.90 points to close at 12,638.32. That left the Dow up 1.27 percent for the week, a rebound from sharp losses incurred in the previous week.
Despite worries that consumers may end up using their stimulus checks to pay off credit card debt rather than spending the money to boost the economy, analysts said they believe about two-thirds of the money will get spent this year, enough to keep the overall economy in positive territory, as measured by the gross domestic product.
The government on Thursday revised its estimate of first quarter GDP growth up to a rate of 0.9 percent, slightly better than the 0.6 percent originally forecast. While many economists had believed the economy would slip into negative territory during the current April-June quarter, the modest growth in consumer spending in April and hopes of better figures going forward are causing analysts to revise their estimates upward.
"So far, the economy is proving more resilient than we gave it credit for," said David Wyss, chief economist at Standard & Poor's in New York, who said GDP growth could come in around 0.5 percent in the current quarter and then rebound to around 2 percent in the July-September quarter, as consumers spend their stimulus checks.
But Wyss and some other analysts cautioned that the boost in economic activity could be short-lived, only delaying a full-blown recession into early next year.
"There is considerable risk that the tax rebates will only put a Band-Aid over a large and growing wound to consumer sentiment with a rising possibility of a sharp pullback in spending later in 2008 or in early 2009," said Brian Bethune, chief U.S. financial economist at Global Insight.