The April 15 deadline for tax payments in the United States is often met with a mix of dread and anticipation – the administrative burden of filing and the possibility of an unexpected refund. This year, those refunds could be much larger than usual, coming at a crucial time.
According to economists at Goldman Sachs, tax refunds are currently 17% higher than last year, amounting to a windfall of $50 billion for consumers by the end of May compared to the same period last year.
This windfall is expected to provide a much-needed boost to consumers and the economy in general, following the surge in fuel prices after the outbreak of the Iran war two months ago.
Last month, consumers seemed to rely on expected refunds to cope with the record rise in gasoline prices. Retail sales in March increased more than expected, according to Tuesday’s figures.
This resilience prompted the Atlanta Fed to raise its GDPNow model estimate for first-quarter growth to an annual rate of 1.2%, up from 0.9%, marking the first upward revision in a month.
While this is a modest improvement, it is welcome. Consumption outlook was reasonably good at the beginning of the year; the Iran war has since significantly dampened them, forcing a downward revision of growth forecasts.
The question now is how long the boost from refunds will last.
Consumer spending is expected to be high in April. Large, one-time refunds are generally considered discretionary income and are often spent quickly rather than saved, especially when households are facing significantly higher costs elsewhere.
But this timing also means that the boost may quickly fade if the energy price shock persists, forcing consumers to dip into savings that have already been depleted in recent months.
Morgan Stanley economists offer a sobering analysis. They predict that the average increase in tax refunds will only offset the surge in gasoline prices if the average pump price does not exceed $3.60 per gallon this year. This figure is still higher than $4.00.
Unless there is a sharp and rapid drop in prices, the pump will swallow the refunds. According to Oxford Economics, second-quarter consumer spending growth could be weak despite the windfall from refunds, possibly below 1%.
Goldman economists are also not optimistic about the ability of consumers to withstand rising pump prices for long before cutting back on spending.
In their base scenario, the Brent barrel price is expected to fall to $80 by the end of the year, down from an average of around $100 since the start of the war on February 28, against $70 the day before, leading to an annual loss of $70 billion for consumers. At current prices, this loss is estimated at $140 billion per year.
Do not call for the capitulation of the American consumer just yet.
Average household balance sheets are in good shape, especially considering how well stock prices have held up. Predictions of the collapse of the American consumer in recent years have consistently underestimated the strength of this “wealth effect.”
Additionally, according to Motio Research, real household income has never been higher since the data series began in 2010, excluding the pandemic-distorted year of 2020.
While the stress index for consumers published Wednesday by the Kearney Consumer Institute shows that 37% of American consumers felt stressed about debt and savings in the first quarter, compared to 10% in the last quarter of last year. But a persistent trend in recent years is the massive disconnect between what consumers report feeling and the actual impact of their anxiety on their spending.
Low-income consumers are indeed much more vulnerable, as they allocate a greater share of their income to energy. But they account for only a limited portion of total U.S. spending, so overall economic numbers can remain high even if large segments of the population are struggling.
In the end, tax refunds are expected to delay the rise in gasoline prices, but like everything related to the crisis, the question is how long this can last.
