Update 784 — Do We Find the Felon Fit?
Macro Stats; Direct File Status; Roundup
“We the Jury of the United States in general election assembled, find…”
Yesterday’s gratifying verdict — issued by the New York Supreme Court jury finding Donald Trump guilty on all 34 counts of falsifying business records in his porn star hush-money to influence the 2016 presidential election — will see eventual legal appeal. But before that, the American people will render the political verdict on November 5. Indeed, we and our judicial and political systems, including Trump-vassal GOP candidates, will be on trial, too.
The felony conviction of Trump puts a spotlight on the reaction of a few mostly independent voters; where even a modest impact could reverse current polls showing Trump ahead in almost all battleground states. Momentarily obscured are macroeconomic developments of the week which, along with the announcement yesterday that the IRS Direct File program for tax filers will be permanent, are covered in the weekly roundup below.
Good weekend, all…
Best,
Dana
Headline
Inflation Holds Steady in April
The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, rose by 2.7 percent on an annualized basis in April, just as it had in March. Core PCE – which strips out food and energy prices – rose by 2.8 percent on a year-on-year basis in April, essentially unchanged from the annualized increase in PCE in March and February, per the April PCE report released by the Bureau of Economic Analysis this morning.
Headline PCE rose by 0.3 percent last month, just as it had during each of the two months prior, while core PCE increased by 0.2 percent, after increasing by 0.3 percent in March and February.
Source: Council of Economic Advisors
Over the month, prices of goods rose by 0.2 percent. Food prices fell by 0.2 percent in April, while energy prices increased by 1.2 percent. Meanwhile, prices for services increased 0.3 percent. Within services, the largest contributors to the increase were housing and utilities (led by housing), health care (both outpatient services and hospitals), and financial services and insurance (led by financial service charges, fees, and commissions).
The new inflation data comes less than two weeks before the Federal Open Market Committee (FOMC) meets next to consider interest rates on June 11 and 12. Today’s data is likely to incline the Committee to hold the federal funds rate steady at the 5.25 to 5.5 percent range as it has every meeting since last July. The Federal Reserve had projected earlier this year that the Committee would cut rates three times this year but has not issued projections since March. At its next meeting, the FOMC is, however, scheduled to release projections outlining its eagerly-anticipated interest rate decisions over the remainder of the year.
Other Developments
Direct File is Here to Stay
Yesterday, the U.S. Department of Treasury and Internal Revenue Service (IRS) announced that Direct File – a free tool that allows taxpayers with simple returns to file their taxes directly with the IRS – will be a permanent resource for filers across the country. The decision to make Direct File permanent was based on an affirmative recommendation from IRS Commissioner Danny Werfel, who cited “overwhelming satisfaction from users and improved ease of tax filing among the reasons for his recommendation.”
This development was met with overwhelming positive support from advocacy organizations and members of Congress familiar with Direct File. As reported by the Washington Post, Senate Finance Chair Ron Wyden called the extension “tremendous news for taxpayers all over the country who are tired of getting ripped off by the big tax prep companies that routinely upcharge for unnecessary services, oversell the quality of their products and offer crummy customer service.”
An invitation to opt into Direct File has been extended to all 50 states and the District of Columbia, but it is too soon to tell how many will be ready to join the effort next year. States with their own income taxes will need to work with the IRS to integrate a state-level program that can work in conjunction with Direct File so that taxpayers can use the tool to complete the full filing process. Notably, the four pilot states with state-level income taxes or credits (California, Massachusetts, New York, and Washington) had great success with this effort in the 2024 filing season, leaving a good roadmap for future participants.
As we noted in last week’s deep dive on Direct File, there are many ways for the IRS to expand the scope in order to allow for use by a wider slate of taxpayers. While this year’s pilot only included W-2 income and some simple credits like the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC), Commissioner Werfel mentioned they will continue to consider expansion with a special focus on working- and middle-income taxpayers. However, decisions regarding scope will likely wait until later in the year.
U.S. GDP Growth Revised Down to 1.3% in First Quarter
The United States economy grew by 1.3 percent – less than the 1.6 percent increase initially estimated by the Bureau of Economic Analysis – in the first quarter of 2024, according to the second estimate of GDP growth in January, February, and March which was released yesterday morning. The second estimate is based on more complete source data than was previously available.
The downward revision primarily reflects new data showing consumer spending softer than had initially been estimated over the first three months of the year. Growth in consumer spending was revised down from 2.5 to 2 percent over the quarter. Spending on goods fell at a 1.9 percent annual pace, which was offset by spending on services, which rose 3.9 percent.
The evidence suggests that stubbornly high inflation and high interest rates are taking a toll on the spending habits of American consumers. Private inventory investment and federal government spending were also revised downward. These factors were partly offset by upward revisions to state and local government spending, nonresidential fixed investment, residential fixed investment, and exports. Imports — a subtraction in the calculation of GDP — were revised up.
Throughout 2023, consumer spending was a driver of America’s economic resilience and strong GDP growth figures, but yesterday’s report provides new evidence that such strong consumer spending may not be sustainable. The third estimate of GDP growth in the first quarter will be released on June 27.
Spotlight: Buy Now Pay Later Products Classified as Credit Cards
Last Wednesday, the Consumer Financial Protection Bureau (CFPB) issued a new interpretive rule confirming that Buy Now, Pay Later (BNPL) lenders are classified as credit card issuers for certain purposes. The rule clarifies that consumers are entitled to some but not all of the same protections whether they access credit through BNPL products or credit cards.
BNPL is a short-term credit option for retail purchases offered by retailers through payment platforms – apps like Affirm, Afterpay and Klarna. Through these BNPL providers, consumers can make online or in-store purchases and repay only their purchase amount, typically in four installments over six weeks. Consumers do not pay any interest as long as they make their payments on time.
As the CFPB found, when consumers purchase goods and services online or in-store, BNPL is frequently offered as an option alongside the option to pay with a credit card. Additionally, consumers often use BNPL credit as a close substitute for conventional credit cards. The BNPL market has been expanding over recent years. From 2021 to 2023, the percentage of consumers who had heard about BNPL credit increased from about half to over three quarters. Last year, almost ten percent of consumers used BNPL credit.
BNPL Awareness and Use by Year (2021-2023)
Source: Federal Reserve Bank of Boston
Consumers are often uncertain about whether they can get a refund on the products and services they purchase through BNPL credit when they return them or whether BNPL lenders will help them if they don’t receive the goods or services they were promised. In fact, the CFPB found that over 13 percent of BNPL transactions involved a return or dispute and in 2021, consumers disputed or returned $1.8 billion in transactions involving Affirm, Afterpay, Klarna, PayPal, and Zip.
The CFPB’s interpretive rule clarifies that BNPL lenders meet the criteria for credit card providers covered by certain provisions under the Truth in Lending Act. Therefore, consumers have a right to dispute charges, and BNPL lenders must investigate those disputes, during which time lenders must pause payment requirements, and at times must return payments. Under the rule, as with traditional credit cards, consumers can also demand refunds after returning products or canceling services purchased with a BNPL loan and lenders must credit the refunds to consumers’ accounts. Lastly, under the interpretive rule, BNPL lenders must provide consumers with periodic billing statements, similar to those issued by credit card providers.
But the CFPB has not extended to BNPL all of the protections that other credit cards receive, such as a requirement to consider the ability to repay and to limit penalty fees to a reasonable and proportional amount. It is not clear if BNPL providers will have to provide clear, uniform fee disclosures through the “Schumer Box” provided for credit cards.
One major BNPL lender, Klarna, called the interpretive guidance “a significant step forward in getting BNPL regulation in place in the US.” Many major BNPL lenders, including Klarna, already investigate disputes, pause payments, and provide consumers with statements. The CFPB’s interpretive guidance gives consumers more clear, enforceable legal rights and brings important uniformity to the growing industry.
Non-upfront payments required through BNPL products are debt and as a form of credit, BNPL products should be regulated as such. That’s why in 2022, 20/20 Vision joined over 70 other consumer advocacy organizations, including the National Consumer Law Center, to urge the Bureau to view these products as credit cards. We applaud the CFPB for taking this important step to ensure all consumers, including the most economically vulnerable, are protected.
Look Ahead
Tuesday, June 4
- House Ways and Means Subcommittee on Social Security hearing: The Social Security Trust Funds in 2024 and Beyond
Wednesday, June 5
- House Committee on Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion hearing: Next Generation Infrastructure: How Tokenization of Real-World Assets Will Facilitate Efficient Markets
Friday, June 7
- May jobs report