Tax refunds, refinancing should fuel growth

WASHINGTON -- A surge in income tax refunds and home-mortgage refinancing is giving U.S. consumers more money to spend, which should fuel strong growth in the first quarter and beyond.

The Internal Revenue Service sent out $6.3 billion in tax refunds through Feb. 5 for 1998 individual returns, almost 11 percent more than the $5.7 billion in checks processed by the same time last year, according to Treasury Department figures.

The Mortgage Bankers Association refinancing index, meanwhile, more than doubled in last year's final quarter from the same period a year earlier. For all last year, reduced monthly house payments from refinancing saved consumers $6.3 billion -- money that fueled spending on autos, furniture and other goods. "It's clear consumers are awash with cash," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. "I would expect stronger-than-expected consumer spending through the spring, which means the domestic side of the economy remains pretty robust for the foreseeable future." Another boost to spending is coming from bonuses paid by companies at the end of the year or early in the first quarter. International Business Machines' non-executive employees will receive a record $1.6 billion in 1998 bonuses, a 20 percent increase from 1997. "Bonus payments are clearly a much bigger part of the landscape than they've ever been, given the gains in the stock market," said Jason Trennert, an economist at Ed Hyman's ISI Group in New York. Consumer spending is the engine of U.S. growth. In 1998, personal consumption accounted for 68.2 percent of the gross domestic product, the most since the government began tracking the consumer's contribution to the economy in 1959. Tax refunds have been going out faster over the past couple of years as Americans increasing embraced electronic filing of tax returns. The number of American relying on telephones and computers to pay their taxes rose to 24.6 million in 1998 from 19.1 million in 1997, according to the IRS. The IRS says refunds go out faster because it's easier and faster to process electronic returns. At the same time, the strong economy is boosting paychecks, withholding -- and refunds. Incomes not adjusted for inflation rose 5 percent last year, on top of a 5.6 percent gain in 1997, even as the workforce grew. The economy created 1.7 million new jobs last year, according to the Labor Department. "More people are earning paychecks today," said Diane Swonk, deputy chief economist at Bank One in Chicago. "They get hit with withholding (taxes) and then they get it back" in refunds. Because many workers entering the labor force start lower on the wage scale, they get a disproportionately large percentage of their withholding back. For those who earn more, the increase in incomes also means more taken out in withholding, as indexing forces people into higher tax brackets. "Good economies are magical things," said Swonk. Stock gains are also fueling U.S. tax collections. For all the turbulence of August and September, the Dow Jones Industrial Average finished 1998 up 16.1 percent, while the Standard & Poor's 500 index rose 26.7 percent and the Nasdaq Composite Index gained 39.6 percent. That kind of performance no doubt increased capital gains taxes. Former Federal Reserve Governor Lawrence Lindsey, now at the American Enterprise Institute, estimates the federal government's take under the lower effective capital gains tax rate, currently 20 percent, rose to $71 billion last year from $29 billion in 1995. Tax shelters help ensure a portion of that goes back to the taxpayer. An even larger factor is the growing popularity of bonuses, often tied to a company's stock performance, as a form of compensation in corporate America. "A surging stock market produces record-setting bonuses," Lindsey told the Senate Budget Committee last month. "Most of these bonus recipients are in upper-income brackets, which helps explain the surge in collections from top bracket individuals." The shift to faster refunds is having a big effect on the timing of consumer spending. In the 1990s, retail sales rose an average of 0.4 percent a month from February through May. In the last three years, that increased to an average gain of 0.8 percent in February and March, then downshifted to an average gain of 0.2 percent in April and May. Total spending during the first quarter is also up, rising 0.5 percent for the past three years after an average 0.4 percent gain for the decade as a whole. The bonus for the economy is that so far, the shift to earlier spending doesn't appear to be subtracting from overall consumption growth. Consumer spending rose 6.1 percent in both the first and second quarters of last year, and finished the year up 4.8 percent -- the biggest increase since 1984. The benefits to the economy from lower mortgage rates vary from year to year. The Mortgage Bankers Association, which gauges the number of people refinancing their mortgages in a weekly index, said last year's $6.3 billion saving dwarfed 1997's savings of $300 million. A year before that, lower interest rates in 1996 led to $5.6 billion in savings from refinancing, said Brian Carey, an economist in the MBA's economic research department. The MBA's refinancing index averaged 2168.5 in the last year's fourth quarter, a 164 percent increase over the average index level of 821.6 in the fourth quarter of 1997. While the MBA's refinancing index fell 5.0 percent to 1654.0 last week, "the index remains at a level which would have set new records in any period before last year," Shepherdson said. Given the strength in refinancing last quarter, "the first half consumption numbers will be significantly stronger," Shepherdson said. There's evidence that's happening. Automakers have already reported January car and truck sales rose 9.4 percent over the same month a year ago, and chain store retailers reported sales rose 5.6 percent last month compared to January 1998.

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