Tax Rebate Could Boost Summer Leisure Stocks
As the government sorts through the logistical nightmare of sending taxpayers some $38 billion in rebate checks over the summer, the debate over exactly how the refund will affect consumer spending wears on.
Fed
Chairman
Alan Greenspan
has noted that, based on what consumers have done with past windfalls, one would expect about a third of the money to be spent. Many forecasters think that, because the rebate precedes longer-term tax reductions, and because of the scope of the Fed's rate cuts this year, the amount spent will be somewhat larger.
Yet while economists have put a lot of time into trying to figure out how the rebate will affect spending and the economy, little work has gone into reckoning exactly where that money is going to be spent. There's very little history to go on, after all. The last tax rebate, in 1975, tells us that consumer spending rose and that companies that dealt in consumer discretionary items benefited, but beyond that it doesn't give us the ability to confidently predict how the spending from this year's rebate will be contoured.
Where the money will be spent will probably depend on how people view the rebate, whether they consider it as a one-time gain or as a down payment on future tax cuts.
Salomon Smith Barney
economist Christopher Weigand votes for the latter, and as a result thinks that much of the money will go toward durable goods purchases. He thinks that rather than blowing the money on more frivolous things, consumers will put the money toward more sober areas, like fixing up their houses. "When you aggregate things up, you're going to see more money spent at places like
Home Depot
(HD) - Get Report
," says Weigand.
Others expect that the spending won't be so sober.
"This is money from God," says
Bank One
deputy chief economist Diane Swonk. "When money falls from the sky, we spend it. Let's go out and have that nice dinner. Let's go out and see that show. Let's do something spontaneous."
If that's the way it works, then maybe the most likely beneficiaries of rebate spending will be consumer-oriented companies whose third-quarter sales have a lot of heft. Many leisure companies see heavy sales in the summer. Amusement-park operator
Six Flags
(PKS)
, for example, typically books more than half of its revenue in the third-quarter. In the same vein, travel-related companies could benefit; the third quarter is big for airlines (though second-quarter profits are higher). And then of course there's beer --
Anheuser-Busch
(BUD) - Get Report
sells more sixes in the summer than any other season.
Companies that see heavy back-to-school sales may also benefit, but here it is important to point out that their wares may not be so discretionary. Textbook sales make the third quarter a big one for publishers, but text books need to be bought anyway. Back-to-school clothes are also something of a must-have (shoe companies do particularly well in the third quarter), but it's possible that the tax rebate will prompt consumers to step up their purchases and splurge on that backpack which, when not filled with books, would be a welcome companion for climbing in Kyrgyzstan.