As we speak, economic stimulus, in the form of about $120 billion in tax rebates, is working its way into America's financial bloodstream. Those taxpayers set up for electronic deposit have already received their cash while those relying on snail mail have started to get checks and will continue to do so through mid-July. For America's retailers, struggling with rising unemployment, inflation, and sluggish sales, this booster shot couldn't have come at a better time. Companies such as Kroger grocery stores have set up programs that permit people to exchange stimulus checks for gift cards with a 10 percent bonus. Other discretionary retailers—apparel, sporting goods, restaurants—are holding out hope that the money will find its way into their registers. After all, when the American consumer has cash, he tends to spend it.

But David Rosenberg, Merrill Lynch's straight-talking chief economist for North America, says it might be different this time. The reason: The chunk of the stimulus package likely to get spent is roughly equivalent to the amount Americans are paying for higher food and gas prices because of inflation. Put another way, you've already spent your stimulus at ExxonMobil.

Here are the numbers. When the president signed the fiscal stimulus into law, gasoline prices were hovering near $3 a gallon. Now they're close to $4 a gallon. Rosenberg says the old rule of thumb is that every penny increase in the price of gas takes $1.3 billion out of the pockets of American households. So he concludes that the higher price of energy is draining about $25 billion out of the discretionary spending pool in this quarter alone. Next, factor in food inflation, which is running at a 9 percent annual rate, compared with the normal 2 percent. Food already eats up about 14 percent of the typical American's household budget. By Rosenberg's reckoning, Americans sticking to their regular diets are paying an extra $25 billion per quarter compared with last year. "The combination of energy and food is draining discretionary spending at a $50 billion quarterly rate," he says.

There is contradictory evidence, but most economists believe Americans spend around 40 percent of their rebates and use the rest to save or pay off debt. Rosenberg believes it's likely that a lot of the rebate cash will be spent simply to keep current on existing debt bills: "We have a record number of Americans behind on their bills, their mortgages, auto loans, and credit cards." So let's assume 40 percent of the $120 billion rebate is spent on nondurable goods: That comes out to $48 billion. Since food and energy inflation is costing us $50 billion (just in the current quarter!), it looks like the rebate could be a bust for clothing and electronics retailers. Americans won't have any extra rebate cash to spend with them.

Since the stimulus is staggered—checks will continue to arrive through mid-July—we won't be able to draw any conclusions for a few more months. But with between 30 percent and 40 percent of the stimulus already disbursed, the early signs aren't encouraging, says Rosenberg. The cash injection hasn't done much to bolster consumer confidence, which slipped to a 16-year low on Tuesday. And the International Council of Shopping Centers reported that chain sales for April were up 3.6 percent year over year—essentially keeping pace with inflation. Data on car sales and early soundings from other retailers have similarly failed to detect a sharp uptick in consumer activity. It's possible that the rolling stimulus may take longer to make its way to the shopping malls than the 2001 stimulus did. It's also possible that the cash may be deployed by many Americans to keep current on car payments and cope with mortgages whose interest rates are adjusting higher. As Rosenberg notes, "We've never had a fiscal stimulus through a credit crunch and a real estate deflation before."

© 2008