Amid all the optimism that the consumer is back, it's worth considering one of the reasons why: a huge tax refund season.
As the economy was nose-diving last spring, most people probably overlooked the record-smashing $259 billion in refunds awarded (as of April 24) "” roughly $40 billion, or 17% ahead of the 2008 tax season.
Back then, panic was in the air, consumers were retrenching and the refunds acted as a Band-Aid on an open wound. But this year, with an economic upturn under way, an even more rewarding tax season is serving more as a vitamin boost.
New IRS data out Friday show that refunds are running about $10 billion ahead of last year's record pace, even though the agency has processed 4% fewer returns.
That means refunds are running about $50 billion ahead of 2008 levels "” hardly chump change. If you consider that the bulk of refunds are doled out within a three-month period (though spread out between the first and second quarter), the extra refunds amount to an annualized 1.3% of GDP.
What's more, as IBD previously reported (subscription required), the Joint Committee on Taxation has estimated that people who don't pay income tax are receiving an extra $30 billion in refundable credits courtesy of the Recovery Act.
Congressional Budget Office analyses shows that such tax giveaways for modest earners tend to have an outsized economic impact because they are very likely to be spent.
The average refund jumped from about $2,370 in 2008 to $2,700 last year, and $2,940 in the current tax season, with close to 80 million refunds awarded to date.
Clearly, there are a number of positive forces driving the cyclical upturn: An inventory turnaround (perhaps nearing completion), growing demand for exports, a roaring stock market rebound and the very beginning of a jobs recovery.
But it may be premature to extrapolate the recovery's current trajectory and worth considering the possibility that the largely overlooked contribution from a tax season bonanza may have juiced the data.
The always-thought-provoking Ryan Avent of The Economist's Free exchange blog on Friday challenged readers to reconcile a surprising drop in the Reuters/Univ. of Michigan consumer sentiment reading for April with an impressive 1.6% jump in March retail sales.
News reports noted concerns about the new health care law among the survey population.
Bill McBride and James Hamilton point to a rise in gas prices as a likely culprit for the drop in confidence.
Here is another possible explanation: Some consumers are feeling a bit poorer after spending their refunds.
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