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Wal-Mart and OPEC are battling for the tax rebates the U.S. government began handing out last week. The result may be a draw for the economy.

While consumers might spend enough of the $117 billion stimulus at retailers to keep the U.S. economy afloat in the months ahead, the boost from their purchases will be diluted by gasoline prices at $3.62 a gallon and rising.

The upshot: The U.S. might avoid an outright contraction in the second quarter and still be saddled with sluggish growth typical of Europe, which expanded at a 0.9 percent annual pace in the six quarters following a 2001 recession.

“It feels like the U.S. is taking a European holiday,'' says Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. “We're in for a long period of growth hugging 1 percent.''

Since President George W. Bush signed the stimulus package in February to much fanfare, the price of a gallon of gasoline has risen 64 cents, according to AAA, the nation's largest automobile club. That's boosting the coffers of the Organization of Petroleum Exporting Countries while robbing consumers of nearly $23 billion in spending power on a quarterly basis.

Food prices, too, have climbed at an annual rate of 5.1 percent since the start of the year, meaning another possible $5 billion or so bite out of consumers' buying potential.

The increases will eat into the $25 billion to $50 billion economists expect the rebates to add to spending in the coming months. Personal consumption accounts for more than two-thirds of the U.S. economy.

`Stimulus Money'

“A lot of that stimulus money is going to go to filling the gasoline tank and the refrigerator,'' says Mark Zandi of Moody's Economy.com in West Chester, Pennsylvania. “It's not going to be quite the boost that most of us were hoping for when it was put together a few months ago.''

The Internal Revenue Service plans to send out about $50 billion in rebates by the end of May. That's more than many economists anticipated and has caused some of them to raise their forecasts for second-quarter gross domestic product. Kasman now predicts the economy will flat-line in the period instead of shrinking 1 percent.

Still, he sees a “recession dynamic'' developing: Companies cut back on spending and hiring in response to slower sales, which weakens the economy even further.

Business Cycles

While a recession is often defined as two consecutive quarters of negative GDP growth, the National Bureau of Economic Research officially dates business cycles using additional factors including personal income to determine when they begin and end.

The NBER's dating committee hasn't made a decision yet on this cycle; still, two of its members say a contraction has probably begun. “It's pretty likely that the recession started in the first quarter,'' says Jeffrey Frankel, a Harvard University professor and former White House economist under President Bill Clinton.

Martin Feldstein, another Harvard professor and head of the NBER, says the economy peaked in December or January and then started to decline.

The government reported last week that the economy grew 0.6 percent in the first quarter, mainly because of an increase in inventories. That data is subject to revision, Frankel says.

Allen Sinai, chief economist for Decision Economics in New York, says the economy will be essentially stagnant well into next year, even with the rebates.

Rebate Checks

The stimulus package gives as much as $600 to individuals who earn $75,000 or less a year. Married couples with household incomes as high as $150,000 will receive as much as $1,200 payday loan. Families will get an additional $300 for each child.

Retailers, eager to get their hands on the money, are offering consumers incentives to spend, not save, it. Shoppers who convert their checks into gift cards at stores of Sears Holdings Corp. will get a 10 percent bonus.

Kroger Co., the largest U.S. supermarket chain, and Wal- Mart Stores Inc., the world's biggest retailer, are among other companies peddling special deals.

Americans may not take the bait. Consumer confidence fell in April to the lowest level in a quarter century, according to the Reuters/University of Michigan monthly survey. Plans to purchase furniture, appliances and home electronics declined to the lowest level since the 1980s.

Triple Whammy

Consumers are being hit by a triple whammy: rising prices, increasing unemployment and shrinking wealth. Companies have cut payrolls for five straight months, by a total of 326,000 workers.

House prices in 20 metropolitan areas fell 12.7 percent in February from a year earlier, the biggest drop since S&P/Case- Shiller began tracking the data seven years ago.

“We've had a very significant deterioration in the financial position of households in the past year,'' Sinai says. “Consumers can't tap their housing equity any more.''

Household debt has risen more than 85 percent since the middle of 2001 — the last time the government handed out tax rebates in a bid to spur the economy. That has prompted some on Wall Street, including David Rosenberg, Merrill Lynch's North American economist in New York, to conclude that consumers will spend less this time, paying down debt instead.

`Stressed-Out Consumer'

“You have a much more stressed-out consumer today than you had in 2001,'' he says.

Congress responded to that recession with a $38 billion plan that gave two-thirds of U.S. households checks of up to $600. Consumers spent between 20 percent and 40 percent of the cash within three months, lifting purchases of nondurable goods by 2.9 percent in the third quarter and helping to end the downturn, according to a 2004 paper by economists David Johnson, formerly of the Bureau of Labor Statistics; Jonathan Parker, then of Princeton University in New Jersey; and Nicholas Souleles of the University of Pennsylvania.

With gasoline and food prices now much higher, Democratic lawmakers say what's needed this time is a new stimulus package. Party leaders in Congress hope to pass a program after Memorial Day that will focus on boosting the economy through more spending on roads and other infrastructure projects. The White House is cool to the idea.

Suspend Taxes

The debate has also spilled over onto the presidential campaign trail. Hillary Clinton, the Democratic senator from New York, and John McCain, the Republican senator from Arizona, have proposed suspending collection of gasoline and diesel taxes to relieve consumers' energy costs this summer. Illinois Senator Barack Obama, Clinton's rival for the Democratic nomination, opposes the idea, saying it will just boost consumption and thus prices.

Clarence Wright, an event planner who lives in Dale City, Virginia, is among those hunkering down, rebate check or no. “Gas prices are definitely cutting into my budget,'' says Wright, 40, who fills the tank of his Nissan Altima twice a week. “We all had a good time in recent years, but it's going to take several years before we get back to times like that.''

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Filed under: economics by Forest