May 29, 2008

How will you spend your $600?
A shopping list for your economic stimulus check (which might or might not stimulate the economy)
By Alec O’Meara aomeara@hippopress.com

George W. Bush has seen better days.

He’s got an approval rating that reads like a batting average, a war that will be compared by historians to Vietnam and an economic track record that took the nation from boom to bust in six years.

In 2000, Bush was elected in part for a promise to give the tax surplus back to the people. Now on the way out, Bush managed to push through another stimulus package that he hopes will jumpstart an economy that is dealing with a credit crisis, inflation in prices for gas and food, and a housing market that is making people uncomfortable about their largest personal investment.

Which brings us to the economic stimulus check. Some have gotten the check already; last-minute filers will probably have to wait a little longer. Either way, it’s coming eventually: $600 for single filers, and $1,200 for those filing jointly (with some variation for the number of children you can claim and other issues; see sidebar). Individuals earning more than $75,000 in 2007, or couples pulling in $150,000, aren’t going to see the money, but everyone else is getting an extra check in the mail to, well, to do whatever they want with. About $150 billion is making it back from Uncle Sam, at least $300 million of which will be coming back to New Hampshire directly.

Is it money to burn? Money to save? What might be best for John Q. Public might not be what’s best for the economy.

Hit the Target
America’s largest retailer wants your George W. Bush money badly. Wal-Mart announced that it will cash stimulus checks at no cost to customers and with no purchase required. The retail giant estimated that six in 10 Americans will be using the money simply to cover family expenses during the summer. And hey, if a consumer has ever wanted his or her own prepaid Wal-Mart debit card, now’s the time. Put any amount of the stimulus check on a card, and the store will waive its activation fee.

On top of the free check cashing, Wal-Mart has been promoting what it calls its own stimulus package since January, a series of price cuts on groceries and household cleaners.

“We know it’s tough right now for Americans and we’re here to help. That’s why we’ll focus on providing real, long-term value on the items that matter and put shoppers in control of their own spending,” said John Fleming, executive vice president for merchandising at Wal-Mart in the store giant’s official and only statement on the stimulus package.

At least half of Hooksett resident Cheryl Storey’s stimulus check appeared headed for Target’s coffers, as she was looking over outdoor accessories at the super-store last week. Storey is planning to do a small-scale remodeling project at her home with the other half, but is still in the process of checking prices before spending the rest.

“It will be a grill, or a fire pit, something like that. I’m not sure on exactly what but I’ll be spending it,” she said.

Consumer spending on everything, even day-to-day stuff like toilet paper and cereal, drives two thirds of the economy, said David Fehr, professor of economics at Southern New Hampshire University. The economy’s best bet is for the money to be spent, period, and circulate through the economy, and Fehr said that in the national sense it doesn’t make here isn’t a lot of difference whether that money is spent at locally owned shops or at big box stores.

“I don’t think that we have the analytical skills to measure the difference in how you spend the money, as long as it is being spent outright,” he said, adding that while spending the money at a local store might keep a local business afloat, spending at a national chain might also improve the business for that franchise, which in turn would encourage further growth by that business in the region, which would also create jobs and help the economy.

Andersonville Studies, a Chicago-based think tank, reports that that for every $100 spent at a locally owned store, about $63 will stay in the region. Hit the mega-chain, and the local return drops to $43. The rest of that money lines the pockets of global corporate giants, and the money isn’t likely to return to the area.

Those looking for a further conscience-clearing for grabbing low prices at a mega chain can find some, at least in part, from the Concord Chamber of Commerce. Tim Sink, president of the Concord Chamber, said that the big box members were regular contributors to the Chamber, and that businesses like Wal-Mart made sizable donations to the community as part of the effort to stay involved locally.

Before getting too wild with the spending spree, however, keep an eye on the price of the regular, everyday purchases, as inflation could make $600 disappear in a hurry. Spend $50 a week on gas, and the stimulus check will have disappeared out the exhaust pipe of the car by Labor Day.

The Federal Reserve’s most recent outlook for inflation in 2008 suggested that fuel and energy prices would level off, but that prediction was made in December 2007 and so far they haven’t. As long as gas prices continue to spike, and there are no signs of slowdown, everything else will likely be dragged along for the ride to make up that cost, Fehr said.

The cost of milk, wheat and other food stores further adds to the mark-up malaise, said Manchester resident Debbie Siciliano, who said that her check was spent “the day before it arrived” on all the markups her family has been dealing with this spring.

“Everyone I know is just using the check to pay the bills, and that’s it,” she said. “Everything is just so marked up right now.”

Keep the money local
Fehr isn’t concerned about how the stimulus money is spent, but smaller local stores that constantly wage wars against the big box stores of the world would beg to differ.

Michael Herrmann, owner of Gibson’s Bookstore in Concord, keeps a poster up in his store with statistics from the Andersonville Study that speak to the importance of spending money at locally owned stores instead of Giant Retail Box Store X. By Herrmann’s count, spending the stimulus check locally nets an additional $120 per check in New Hampshire.

“I’d love it if they spent the money here, but the rest of downtown could use the money too,” Herrmann said.

The bookstore isn’t offering any special deals for stimulus check spending, but Herrmann is more than willing to offer advice on how to work existing deals such as discounts for shopping on Sunday, discounts on parking at the downtown garage, and filling up a frequent shopper card.

Just down the street in Concord, Pitchfork Records is also hoping to draw in stimulus money. The indie music store isn’t running special promotions but will bank on its selection and variety to get added cash.

“[A big box store] just got rid of its jazz collection, so now this is the best place for jazz,” said George Garos, spokesman at Pitchfork. “We’ve got the variety, and we’ve got the knowledge that you can’t get anywhere else.”

Protective of the smaller businesses, Sink said that all members of the Chamber would be greatly appreciative of the stimulus money, especially the smaller outfits looking to tough it out through the rough economy. The last six months, and the spring especially, have seen a lot of empty stores.

“There’s definitely some belt-tightening going on out there, and our businesses are feeling it everywhere,” Sink said.

Diane Beauregard, manager at Granite State Furniture in Hooksett (currently with sofas starting at $649 and dinette sets at $349) takes the argument a step further. Not only should consumers be looking to buy locally, but they should put in the effort to buy goods that were made in the country as well, she said — as are 95 percent of the goods at her store.

“When you make the effort to purchase something domestically, that purchase is more likely to come back to pay dividends right into your own backyard,” she said.

However, while both Herrmann and Garos said that they’d love to see the money stay local, both agreed there is a more proactive way for people to spend the money.

“The boring answer to the question is to pay off the credit cards,” Herrmann said. “That’s probably the smartest thing to do.”

“You have to pay off the credit cards, that’s what most people are going to do, right?” Garos added.

Solve your personal credit crisis
The general rule of thumb, Fehr said, is for a person to keep debt payments within 30 percent of their annual take-home income. That figure includes mortgages, student loans, credit cards, and any other loans one might take out.

“I believe that part of the reason we are dealing with a credit crisis now is that there was a level of over-exuberance within the economy, and that rule of thumb was ignored by a lot of people,” Fehr said.

On the side of the consumer, the decision on whether or not to pay off existing debt should be a no-brainer, said Jeane Fullerton, financial planner for Lodestone Financial in Manchester.

“If you have credit card debt, then you should [make] an absolute, black and white, decision to pay that debt off first before doing anything else with the money,” she said, adding that if an individual is building credit debt into their monthly budget, then they have a larger financial problem than what a $600 check would fix.

The average non-mortgage debt for Americans runs at a little over $9,300 per household, according to a study at Cardweb.com, a credit research group. Credit cards make up as much as $2,000 of that figure. Maintaining control of one’s credit is a crucial part of keeping one’s credit score good, which in turn can manifest itself in lower interest rates and more opportunities when buying a home or another major purchase, such as a car.

Once the debt is in place, paying it off is the best investment in the future a person can make, said Joshua Wright, senior vice president of investments at the Manchester branch of Wachovia Financial. It’s addition by subtraction, as the interest rates you won’t be paying on the debt far outweigh any interest rates gained by saving or investing.

That’s the good in paying off cards. The bad, or at least the less good, is that the money won’t be going to people who really need the help.The largest credit card providers in the country, guys like MBNA Financial, Citigroup, and JP Morgan Chase, are also some of the largest financial institutions in the world.

While paying off bills is a step toward more solid financial footing, it will likely do little in terms of the big picture.

“We’re talking about reversing a major social phenomenon here,” Wright said. “Obviously, the credit crisis is a huge problem, but based on human nature, we know that (major debt repayment) isn’t going to happen.”

Save it
Probably the most boring option available to consumers is also the most advantageous for most Americans. Take the money, throw it in the bank and save it for a rainy day. It might not be the flashiest thing in the world, but saving the money or investing it wisely would likely be of the most long-term benefit for many.

The impact the check will have depends on the financial situation of the recipient, Fehr said, but saving, especially putting the money into a long-term investment plan, is good business when times are tough.

“With the tough economy, many consumers may have dwindling balances in the bank, and saving could be a priority for them, as well as bolstering that rainy day fund,” he said. “When credit is tight, as it is now, it is wise to have more cash on hand.”

Likewise, putting more money in the bank can be good for banks as well, Fehr said. With more money to work with, banks would likely be more able to offer loans, which in turn might create an opportunity for someone else. Place the money into an online savings account with no debit card access, and it’s possible to find an interest rate around 3.5 percent. That’s decent for a rainy day fund, Wright said. An investment of $600 could jump start a savings fund, but the prudent thing for any saver is to have a portion of each check automatically going toward a long-term investment.

If retirement is the concern, then age becomes a factor in the effectiveness of the check. For a 58-year-old getting squeezed out of the firm, $600 will do little more than pay for the gold watch. The people who might have a real investment use for the money are, naturally, the ones least likely to use it in that manner.

If you invest the money in an aggressive, high-yield Roth IRA, you can reasonably expect 10 percent annual interest over time, Wright said. At that rate, an investor can expect to double their money every 7.2 years. For a 25-year-old, that means that $600 becomes $19,200 in about 36 years, or just about time to think about retirement, just by sitting in the bank. Get a 12 percent rate of return, and the money doubles yet again in that time frame, he added, giving the investor nearly $40,000 in stimulus money — in 2044.

“Invest, and you give yourself options for the rest of your life,” Wright said. “You are able to do so much more, and plan for so much more.”

Still, investors can talk of the magic of compound interest all they want, but it might be hard for that 25-year-old to resist the urge to buy that pimped-out Playstation 3.

“It is going to be extremely tempting to spend that money right away,” Fehr said. “Businesses know that we are going to be getting this money, and there will be a number of advertisements and promotions compelling us to take advantage of that.”

Besides, getting Americans to do what they do best, spend, is what Washington was counting on when it agreed to this stimulus package.

Finally, as good an idea as saving or investing the money might be, everyone — Fehr, Wright, Herrmann, Fullerton and Siciliano, everyone — agreed that getting the debt monster in check is the first plan for the stimulus money.

Well, almost everyone.

Buy big
It’s the economic model Las Vegas was practically built on: go in spending a little, and leave spending a lot. Using the stimulus money on something like buying a new car, or some other major purchase that involves taking on new debt, would make Bush and his buddies stand up and cheer. Not only would the consumer be committing to spending the stimulus money, but an added commitment would have been made to spend even more.

The basic economic model is consumer spending, Fehr said, meaning that more spending equals only more good news for the economy at large.

Ralph Fast, general sales manager for Team Nissan in Manchester, argues that using the money toward a down payment might represent a savings in the long run, by noting that if you’re already making car payments, and those payments don’t increase with a new purchase, a new vehicle could represent increased fuel efficiency and lower maintenance costs. Both of those things could have a great short-term impact on a person’s budget. “In that case, the only new costs you’re looking at would be the excise tax and registration,” Fast said.

One trend Fast has been seeing is people bailing out of SUVs and trucks in favor of smaller models to get out from under massive bills at the pump.

Four-year-old trucks or SUVs with about 80,000 miles on them are running around $6,000 in trade-in value, according to Kelley’s Blue Book Web site, a chief resource in assessing used car values.

Deals like offering matching dollars on stimulus checks for a down payment are being considered by Nissan and Autofair Ford, Honda and Hyundai in Manchester, giving buyers a chance to double the value of the check.

Autofair spokesman Larry Tentarelli added that while mortgage banks were getting increasingly concerned with home loans, that concern had yet to translate to automotive financing.

“People may think because of the current mortgage crisis that it would be difficult to obtain automotive financing, when in fact the opposite is true,” he said. “We can help get people financed for a vehicle purchase, even with less than perfect credit.”

On the flip side, repossessions are up 15 percent in 2008, according to Adesa Inc., a national corporation that auctions used vehicles, due to people having trouble with making payments. Loans may be good now, but increased defaulting and foreclosures could impact the rate down the road.

Finally, the potential for future inflation might make it smart to make a big-ticket purchase sooner rather than later. At the cost of everything goes up, having set payments on a purchase already made assures that even if cars cost more in 2012, the buyer is still paying a 2008 price.

However, acquiring more debt with a big-ticket impulse purchase isn’t exactly wise fiscal planning. As with any major purchase, long-term planning is the key to avoiding a damaging credit mishap, Fehr said.

Improve your home
Dropping the money into a minor home improvement project could be a win-win, for the economy and for the consumer. Contracting work equates with spending, Fehr said, and the added value to one’s home could certainly work out as an investment for the future.

The downside to home investment, however, is that it might not turn out to be all that much of an investment. Dwindling home values have shown that what appears as an increase in net wealth can turn out to be a mirage.

“Recent market trends suggest that maybe too much emphasis has gone toward looking at a home as an investment,” Fehr said. “We should look at home improvements as tilted more toward the consumption end and less toward an investment.”

Home improvement is the check use of choice for Tim Sink (of Concord’s Chamber of Commerce), who said that he was considering a deck addition, though he added that the project would probably tap into his wife’s check as well.

“That’s our way of doing our part,” he said.

Steve Bouchard of Queen City Remodeling in Manchester agreed that for stimulus money alone, there wouldn’t be enough money to do work that would change the value of a home. However, what was very possible, and a better idea, was to take on a smaller project that might not change a property’s assessment but would save dollars on heat or electricity. Redo some wiring. Insulate the attack. Even replacing the front door with a better-insulated storm door could cut down on the cost of heating the home. Bouchard said that depending on the home and the project, a jump of 40 or 50 percent in heat or energy efficiency is possible in the price range of a stimulus check.

Another advantage of the infrastructure work is that because it wouldn’t have a huge impact on the overall value of a home, it likely wouldn’t change the assessment on a property. No change in value means one’s tax bill is unlikely to spike.

Bouchard said that the spring had been unkind to his business. With people tightening their belts, the larger home remodeling projects seem to have dried up, he said. A spring home show that he counts on annually for $50,000 to $100,000 worth of work netted a $4,500 project, and Queen City has been filling the time with several smaller projects like the ones he described.

“The last six to eight weeks have been real tough,” he said. “Let’s hope that these stimulus checks are going to make a big difference.”

Live it up
Treating yourself to a few nights out on the town with the money might seem wasteful at first, but it might just be the best thing you can do to help out the local economy. While Fehr made a point of saying that it doesn’t matter where someone spends their free money, the tune changed when the restaurant and hospitality industry was brought into the picture.

“Restaurants are getting hit hard right now on both sides,” he said. “Ingredient costs are rising, and in tough economic times, people go out to eat less because they are watching their dollars more closely. And I’m sure owners don’t want to add to that feeling by raising their own prices.”

In New Hampshire, where tourism is the top industry in the state, eating out becomes all the more important. Erik Sealander, owner of the newly opened 900 Degrees in Manchester, said that he’s been feeling the pinch on groceries, though a dinner for two remains around $35, he estimates, especially when adding in a couple of drinks. Sealander has 17 years of experience managing eateries and agrees that the current climate is a tough one, as the increases in inflation are eating into the bottom line of each dish.

“I think it’s a real precarious time right now for restaurants,” he said. “I’ve seen a surcharge in all of my dishes. Flour has gone up. Dairy has gone up. It’s all been passed down on me, and it stinks.”

Thus far, however, Sealander said that he’s kept a fairly constant flow of traffic in and out of the restaurant. To keep patrons coming in, the manager is investing in a deck area, which he hopes will help though the summer, which is notoriously tough in Manchester as people go and enjoy the warm weather elsewhere.

“You want to find a way to keep the interest there,” he said. “In such trying times, people deserve to treat themselves in any way, shape, or form they can. They should be able to go out and have a good time with friends and family.”

Restaurants have it tough, but other forms of luxury or entertainment are also taking a hit. Asked what the best use of stimulus money in Concord would be, Sink replied that Red River Theatres in Concord could use the business very much, thanks.

“It’s a great facility, and it can use all the local support it can get,” he said.

A married couple filing jointly could see as much as $1,200. If spent purely on weekend fun, that money is good for about $100 a week through the summer months. One nice meal every Saturday night is more than possible on that kind of budget, and there’d be the added benefit of doing a good deed for the region. Unfortunately, aside from good times and memories, the only long-term gains the stimulus diet will net for the spender will be found at the waistline.

So, how stimulated is the economy?
Think, for a minute, back to 2001. No no, not that part of 2001, but earlier in the spring when everyone received the first of Bush’s checks in the mail. That check, available due to a budget surplus, became a major talking point of the 2000 presidential election; Bush wanted to mail the surplus back to people, Al Gore wanted to save the money in the event something unexpected happened. Bush won, and checks ranging from $300 to $600 were sent out to most Americans.

Remember an especially huge bump in the local economy stemming from that? Think anyone was sitting around in July 2002 remembering all the business generated from that massive wave of tax rebates injected into the economy? No? Therein lies the most compelling argument for why the stimulus checks will have little if any real impact on the current economic situation.

“I have my doubts,” Sink said. “I worry that it is kind of a short-term fix that doesn’t really solve the problem, sort of like the gas tax holiday that they were talking about.”

Fehr doesn’t disagree with Sink’s assessment, saying it’s hard to determine the impact of the stimulus package without knowing how the money will actually be utilized. Still, an extra $150 billion of additional money will have an impact, he said, as long as much of it goes back into circulation.

“Let’s put it this way, it isn’t going to hurt the situation,” he said.

A check for $600 isn’t going to lower the price of gas, slow inflation (and here’s a sobering thought: more money in circulation could make prices rise faster) or keep a home bought with a shady mortgage from foreclosing. What it will do, Fehr said, is allow for a little extra spending money in a summer where having a little extra money might be much appreciated.

Seriously, though, use the money on those credit card bills if you can.

“If you ask again, I’ll say yes again,” Fullerton said. “Credit cards first, period.”