BoA highlights that US tax payers are set for big refunds this year in light of the latest tax cuts.
It’s an 18% increase from the prior three years it will almost all come from Feb-April.
Consumers should get about $65bn in the form of larger-than-usual tax refunds due to favorable treatment of tips and overtime, and a bigger standard deduction for seniors. In the last few years, refunds have come in at about $360bn (1.2% of GDP).
This chart illustrates the usual timing of payments and they’re surprisingly front-loaded with those owed money typically working to get those refunds in February, continuing into March and April. In the last three years, around 70% of annual refunds have been paid out from February to April.
From Bank of America:
Given growing concerns about affordability, we expect a large share of next year’s “windfall” increase in refunds to get spent quickly. Our base case is that the upswing in demand will start in March, peak in 2Q and possibly extend into the summer. Therefore, if the labor market can make it through the winter, it could get a new lease on life.
That dynamic underscores one of the things I’ve been writing for 15 years: Never underestimate the spending power of the US consumer. The US savings rate has been trendling lower in the last few years (towards zero) but the government is going to keep the party going by running larger deficits.
At some point this will need to be paid back but until Congress starts to put the squeeze on consumers or businesses via higher taxes, then there is no reason to see any kind of change in trend. As we’ve highlighted before, the marginal money here is going to high earners already, so the velocity of this money might not be impressive, but it will keep the first-class section of the airplanes full.
This article was written by Adam Button at investinglive.com.