Tax Refunds Help Send False Recovery Signal

A taxpayer gets a refund check under the new stimulus program and then spends most of the money. That trend may help retail sales for the current quarter, but it will not help companies like Gap (GPS) and Dillard’s (DDS) over the longer term.

The bump-up in retail sales may also mislead investors into thinking that it is safe to wade back into retail shares which have been depressed since the last holiday season.

According to The Wall Street Journal,  “Individual federal tax refunds are way up this year, helping to buttress consumer spending amid the recession. But the refund-fueled boost could wear off within a few weeks.”

The spending will just be a puff of smoke. Once it hits the air for a moment it will be gone.

There is still overwhelming evidence that rising unemployment and lack of access to credit will cripple retail sales for months. Several bank analysts have pointed out that financial firms are quickly cutting the spending limits on credit cards to lower their exposure to consumers who are or may become over-extended. With those restrictions in place, store traffic and sales will be impeded well beyond the end of the 2009, creating another holiday sales disaster.

Government money that helps consumers, no matter what form its takes, will temporarily make a case that the retail customer has returned to the marketplace. But, it is much more likely that he will be in hibernation for a long time, The most desperate retailers are still likely to have to lay-off more people or close.

Douglas A. McIntyre