Stimulus Checks Revisited

by: Markham Lee

If you recall I  previously noted that the increase in May's personal savings rate roughly matched the amount of stimulus checks issued during that time period, indicating that the majority of stimulus checks were saved rather than spent. It now appears that same thing occurred this past June:

(From the WSJ): Matthew D. Shapiro and Joel Slemrod of the University of Michigan wrote the pre-eminent paper on the government’s 2001 stimulus payment . They have examined the preliminary data from the Bureau of Economic Analysis, and come to the conclusion that most of the 2008 stimulus payments went into savings. In the following analysis provided to Real Time Economics, Messrs. Shapiro and Slemrod suggest a second round of stimulus being considered by the government would be better spent on infrastructure investments of payments to states:

Data for May and June suggest that the rebate payments provided by the Economic Stimulus Act of 2008 may not yet have provided much of a boost to consumption. The increase in personal saving in May and June approximately matched the size of the rebate checks in those months.

Here are the official numbers from the Bureau of Economic Analysis. Personal saving was $45.6 billion in May, compared to $48.1 billion in stimulus payments in May. Personal saving in June was $23.0 billion, compared to $27.9 stimulus payments in June. In stark contrast, personal saving averaged only $2.9 billion per month during the first four months of the year.

The personal saving rate tells the same story. After running under 0.5% during the first four months of 2008, it jumped to 4.9% in May and 2.5% in June. The change in the personal saving rate corresponds closely to the size of the rebate as a percentage of disposable income. The figure shows how most of the rebate payments appear to have gone straight into saving. 

That most of the rebate checks were saved is, though, consistent with the results we find using the University of Michigan Survey of Consumers. When consumers were asked whether their stimulus check would lead them to “mostly spend, mostly save, or mostly pay down debt,” only 18% answered that it would lead them to mostly spend more. Because “mostly spend” could mean that the respondent increased spending by 51%, or 100%, or some fraction in between, of the rebate payment, and the same applies to “mostly save” or “mostly pay down debt” responses, the 18% “mostly spend” rate probably corresponds to an aggregate spending percentage of about one-third. The aggregate data are consistent with the survey results that most of the rebates have not yet been spent. The slight decline in the saving rate excluding the rebate shown in the figure is consistent with the modest amount of spending reported by survey respondents.

Recent news reports have featured interviews with consumers saying they spent the rebate check to meet higher day-to-day expenses that have resulted from the increase in the cost of food and energy. Does such consumer behavior correspond to spending that would stimulate the economy? That depends on what the consumers would have done if they had not received the rebate check. If they would have not made those purchases absent the rebate, then the rebate was spent. If the rebate let them avoid running up higher credit card bills for gas and groceries they would have purchased even without the rebate, then the rebate was saved. The aggregate and survey data suggest that reports of spending the rebate to pay for gasoline and other bills does not correspond to incremental purchases in response to the extra cash.


Graphic courtesy of the WSJ


Now there are retailers (like Wal-Mart) who are citing stimulus checks as boosting their sales, however I would that's (in my opinion) more of a function of their low income customer base than how the checks were used on aggregate. After all Wal-Mart made a big deal of the fact that they were going to cash stimulus checks for free, and people with bank accounts have no need of such a service. I also suspect that if you were to break down usage of stimulus checks by income strata you'd find that Wal-Mart customers spent a higher % of their stimulus checks, then did households that are more firmly middle class and up.


Overall it points to degree of caution on the part of part of consumers and the start of what is (hopefully) a trend towards better money management and higher savings rates, let's not forget that the smartest thing for consumers to do with their stimulus checks is to save them. While retailers and the architects of the stimulus package may be disappointed by the results, we should all celebrate the fact that consumers (on aggregate) did the right thing.


Finally this study should really put to rest any of the claims (in the media or otherwise) that the stimulus checks caused a big boost to customer spending, because there is really no data suggesting that people spent anything more than a minor percentage of their stimulus checks. You could even argue that some of the claims around stimulus checks were result of "fill in the blank reasoning", AKA assigning cause for a particular phenomena to the thing you want/already believe/think is the cause without having done any research to determine what the actual cause/behavior is.


You can read the entire article  here.




The WSJ: "Economists: Most Stimulus Went Into Savings" -- August 7, 2008.