How tax refunds that are getting smaller fit into the picture of a slowing economy

Important Points

These trends, which include a decrease in the overall Treasury checks and a reduction of refund dollars due to inflation or pandemic savings, will become more prominent as these trends continue.

The consumer has helped to keep the economy moving with increased spending and cash. Higher wages, surplus savings, and pandemic stimuli are among the reasons for this. As pandemic tailwinds fade, another example is becoming a distant memory: tax refunds that are larger than usual.

Walmart's chief financial officer, John David Rainey, noted several "crosscurrents" that influenced the retail consumer during the last quarter. The Covid era supplemental SNAP benefits expired in Febraury. Rainey stated that this was a negative net for the program. Rainey noted that there were some offsets. He cited an increase in Social Security Benefits with the Cost of Living Adjustment. On the tax front, however, he cited recent data showing that average refunds are trending downward.

"Earlier in this quarter, taxes and your refunds were higher than last year. In the last five to six weeks, however, we have seen a decline. Rainey stated that the net for the quarter was actually lower than last year.

According to the IRS's latest data, the average tax refund has decreased by 10.4% from $3,226 in 2013 to $2,910 this year.

Jack Kleinhenz is the chief economist of the National Retail Federation. He said, "We are definitely more cautious with the consumer."

The CPI report was the biggest economic report this week. While it showed some progress in inflation, there is still a long way to go before the consumer picture becomes clear. Friday will bring the next monthly retail sales report, as well as an update from the IRS on the latest filing statistics. The NRF chief economist warns that there may be more signs of consumer slowdown. The consumer is a strong force in the economy, as the benefits of the pandemic and tax credits are fading.

Data also show a lag. NRF's historical surveying and other surveys show that consumers wait to spend until they receive their refunds. This year, however, they are submitting tax returns later. The pandemic has likely pushed back the deadline for filing taxes and created a behavioral shift.

Kleinhenz explained that "the research shows that spending does not happen immediately. It continues for a considerable amount of time. Therefore, the lower refund of tax impacts consumer spending throughout the first half year."

The decline in the average refund of more than 10% from year to date is simply a return to normality for the tax dollars that Americans used to receive. In both 2021 and 2010, the average refund remained at $2,900. Kleinhenz warns that there is an important caveat: people are seeing a refund amount similar to the one they saw in the past, but at a time of inflation.

It's a double-edged sword this year: Less in refund dollars and less dollars going to the consumers. This is especially true for low- and moderate-income consumers, who are the most affected by the rising cost of food, despite the fact that inflation in general has decreased.

The rate of inflation is affecting people's lives. "Payrolls have slowed, if they are not even declining." Kleinhenz stated that even though the rate of inflation is declining, it still causes heartburn.

The historical data shows that Americans consistently use their tax refunds to pay off debt before spending or saving - and this is at a modest income level.

This is confirmed by a new CNBC Your Money poll released on Tuesday.

As inflation continues to rise, consumers will spend more on essentials. According to NRF data for 2022, 31% Americans claimed they used their tax refunds as everyday expenses. This is up from 25% during the pre-pandemic year (pre-inflationary) of 2019. Kleinhenz explained that during a period of high inflation, more people will use their tax refunds for daily expenses.

The NRF's data is in line with the CNBC study. It expects that more refund dollars will be used to pay off debt, particularly given the fact Americans have increased their debt since the pandemic stimulus was depleted. The NRF is also expecting that the refunds going to savings accounts will increase significantly this year to replenish these depleted funds.

The lower refunds will affect all spending, including retail, and this will continue through the next quarter. This does not mean that retail sales will be negative or that the economy will turn negative in the coming year. NRF is forecasting a 4-6% growth rate and has taken into account the tax data. Retail sales will slow down as the year progresses as wage growth slows, and credit restrictions weigh on businesses and consumers.

Kleinhenz says that the GDP and Q2 spending could be "OK but lower" and consumers will still be driving the economy. "But as we move into later in the year, the deceleration of the economy will become most evident."

He noted some sectors of the goods economy already showing year-over-year price declines, including appliance and electronics stores, home furnishing retail, and general merchandise/department stores.

He said, "We are already seeing the inflation rate in retail come down except in food. That's a big wild card when I think of what will happen to the consumer in 2023. Especially the low- and medium-income consumers."

In this "tale about two consumers" economy, it's often been said that two thirds of the spending is done by just one-third of consumers. The latest CPI shows that Americans are continuing to spend more, as airfares have increased again. Restaurant inflation has also outpaced grocery inflation for the very first time since the mid-2021 period.

The difference in average refunds of $300 is not significant to those who are well-off. But for many taxpayers, it's a major economic burden. This is because the Federal Reserve has a difficult time balancing its policy decisions. It must do just enough to avoid pushing the economy into recession. The economy is slowing down, the inflation rate is falling, and there are signs that the labor market may be slowing. A new release of Fed minutes on Wednesday showed greater concern over banking industry issues pushing the economy into recession. The Fed is not yet convinced that the current economic situation warrants a rate cut.

Businesses should not be surprised by the smaller refunds of tax -- this data has been accumulating over the last four to six week. The Walmart CFO's comments may show up in earnings related to consumers as the corporate reporting season gets underway. Individual tax payers will be surprised to see what they get this year in comparison with last year. Kleinhenz says that as consumers, it could have a psychological effect on what they do.