Bush places $170bn bet on retail therapy

Bush places $170bn bet on retail therapy

By James Politi in Washington and Daniel Pimlott in New York

Published: February 13 2008 15:06 | Last updated: February 14 2008 02:27

President George W. Bush signed into law on Wednesday a $170bn (£87bn) fiscal stimulus package designed to jolt the US economy back into health in the second half of this year.

He said that US economic growth had “clearly slowed”, but added: “The genius of our system is that it can absorb such shocks and emerge even stronger.”

The plan marks a bet by the White House and Congress that consumers will rapidly spend at least 40 per cent of the $300 to $1,200 tax rebates to be handed to them in May as the mainstay of the stimulus package.

If successful, the move could add up to 3 percentage points to US gross domestic product in the third quarter on an annualised basis, economists say – allowing the economy to spring back from the woes that have brought it to the brink of recession.

Fears remain that should economic conditions worsen sharply before the stimulus kicks in, its effect might be muted, as cash-strapped consumers save the money or use it to pay off credit-card debts instead of spending it. “For some people, it is going to be mad money; for some it is going to be a way of reducing debt,” said Brian Bethune of the US macro-economics group at Global Insight, the analysts.

Mr Bush’s signature follows rapid agreement in Washington on the terms of the plan, with Democrats and Republicans making a series of election-year concessions that delivered legislation within a few weeks.

The White House agreed not to tie the stimulus package to permanent tax cuts, while Democrats in the Senate agreed to drop their insistence on measures such as an extension of unemployment insurance, heating assistance and tax credits for renewable energy.

The rebate cheques to consumers account for about two-thirds of the plan. The remaining money will be destined for businesses, in the form of tax incentives to encourage them to buy large items of equipment.

Since the stimulus discussions began last month, fears that the US might experience a recession this year have grown, with ­several economic indicators taking a turn for the worse.

January’s employment report showed an unexpected loss of 17,000 jobs, while a services industry survey showed a drop in sentiment. Retail sales rose slightly, but underlying trends were downbeat.