Rebate checks not seen as a cure-all

THE MINNESOTA INVESTOR

GENE WALDEN

This month, an extra check could arrive in your mailbox -- an economic stimulus check from the federal government. Exactly how much effect it will have in stimulating the economy or in helping consumers pay their bills and fight inflation remains to be seen.

Few people outside of Congress expect the checks to work miracles for the economy. Susan Stiles, a Minnetonka-based financial adviser, expects many recipients to use the money simply to pay down credit-card debt or to add to their savings.

"The premise is that if you can get cash into people's hands, they will spend it and put it back into the economy," Stiles says. "But I get the sense that a lot of people will simply hold onto the money or use it to pay off debt."

She has a lot more faith in the fiscal responsibility of the U.S. consumer than I do. We're a nation of debtors because we're a nation of spenders -- and free money is hard to resist.

Assuming one of those checks lands in my mailbox (electronic payments to people who did their taxes by e-filing started being sent last week), I certainly have a short list of projects around the house that I would like to fund -- and I doubt I'm alone. I think a lot of consumers who have been watching their pennies this year will welcome their stimulus checks as fun money that they can freely spend.

But exactly what will we spend our money on? Many will probably flock to the stores to buy clothing, appliances and other goods -- products often made in China. So the plan could very well help stimulate the Chinese economy.

People may also use the money to pay for some work around their homes, but in reality, a few hundred dollars is not going to go very far. You can't redo the kitchen, finish the basement or put a new roof on the house. It won't buy you a new car either, although maybe it will help with a down payment.

Nor are stimulus payments going to help cash-strapped homeowners who have subprime mortgages to hold onto their homes. It may help them pay the mortgage for an extra month or two, but it's certainly not a long-term solution.

In other words, it will probably give a boost to retailers, such as Best Buy, Kohl's and Target, and to some manufacturers of consumer goods and related products, such as 3M, Bemis and Valspar. But it is unlikely to reenergize the construction, housing or financial-services industries.

"Congress was trying to hit a home run with this package," Stiles says. "I don't think that's going to happen. I don't think it will keep us from going into a recession, but it might help consumer confidence, which is very low right now. The fact that consumers can use the money to pay down debt or put it away in their savings might help raise consumer confidence."

Under the plan, individual taxpayers who have adjusted gross incomes of $75,000 or less will get $600. Married couples who earn a combined $150,000 or less will receive $1,200, plus $300 for each child under age 18. If you earn more than the maximum limit, you could still get a partial payment. The payout is reduced by 5 percent of the amount that your income exceeds the limit. In other words, a married couple who earned $160,000 -- $10,000 over the limit -- would have their payment reduced by 5 percent of $10,000, or by $500.

Helping the small guy?

One Twin Cities business owner who has taken advantage of the incentives offered to small manufacturers in the stimulus package is confident that the plan will spur economic growth. Erick Ajax, who owns E.J. Ajax and Sons, a Fridley-based manufacturer of metal brackets, hinges and related products, was at the White House as a guest of the U.S. Department of Commerce when the bill was signed.

"It's a nice gesture to give taxpayers $600 apiece, but it probably isn't going to go that far in terms of stimulating the economy," Ajax says. "The real benefit will come from companies like mine [that] use the incentive plan to make capital improvements."

Ajax recently purchased a new $250,000 metal punch press for his shop. Through the stimulus plan, he can accelerate the depreciation to a one-year schedule instead of the normal seven-year schedule.

"As a result, I've hired five new people to run the press, and we are increasing production and sales to our customers overseas," he says. "Adding five new employees for a company our size -- we only have 50 employees -- makes a significant difference."

Ajax expects that many other small manufacturers across the country will follow suit, increasing their capital expenditures and hiring additional employees. "Nine out of 10 manufacturing jobs are at companies like ours that have fewer than 200 employees," he says.

If other small manufacturing company owners such as Ajax take advantage of the plan to expand their businesses, the stimulus package really could have a significant effect on the economy.

Gene Walden is the author of more than 20 books about business and investing. He lives in the Twin Cities. Send questions or comments to gwalden100@comcast.net, or visit Allstarstocks.com.