Retail: Child Tax Credit Checks Will Support Holiday Spending

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Child tax credit checks being sent out by the IRS will support more consumer spending, especially ahead of the holidays. Checks will be sent on the 15th of each month through the end of the year. The stimulus law raised the credit for 2021 only, and authorized the IRS to pay out half the child tax credit this year, instead of having families wait to file their 2021 tax returns next year. The credit is $3,600 for each child age five and under, and $3,000 for ages six to 17, subject to income limits.

Retail sales excluding motor vehicles rose strongly in June, reversing a May drop. Sales are at a high level, 18% more than before the pandemic. Vehicle sales have dropped because car manufacturers have cut production for lack of computer ships to put in them. Once this problem is resolved, sales will surge again.

High building materials costs are likely hurting home remodeling activity. A shortage of lumber and resulting high prices have likely contributed to the drop in building materials and furniture sales for the past several months. Lumber prices are beginning to ease a bit, however.

Going forward, retail sales will be dampened a little by a shift in consumer spending toward services as the economy opens up fully. Spending on eating out continues to surge, for example. But clothing sales will see catchup growth, since many wardrobes had been neglected during the era of social distancing and working from home. 

Still, spending should continue to show strength during the rest of the year, as high savings and growing employment income take over from the initial burst of spending fueled by stimulus checks. The added child tax credit checks are icing on the spending cake. It’s possible that the rising COVID-19 infection rate caused by the spread of the Delta variant could diminish spending on services, and refocus it on goods for a time.

Retail sales excluding gasoline should rise by 18% this year, and by 9% for all consumer spending. All this spending is likely to boost yearly GDP growth to around 7%.