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How the Food Stamps Cut Will Affect the U.S. Economy

By Brendan Marasco - Nov 7, 2013 at 9:42AM

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Is the food stamp debacle evidence of America's financial problems?

Following the U.S. National Debt Clock is frightening. America's national debt sits at $17 trillion already, and it increases an additional $2.63 billion each day. And government stimulus continues to pour into the economy. As seen in the recent food stamp cut debacle, government stimulus cannot sustain long-term success while necessary pullbacks cause rippling effects through the economy.

The backstory
In the wake of the 2009 financial crisis, Congress passed the American Recovery and Reinvestment Act, which, in part, increased funding for the Supplemental Nutrition Assistance Program (SNAP). According to the Center of Budget and Policy Priorities, the average increase of food stamp users was 20% in dollars per household. Then the one-time stimulus boost deadline arrived on Oct. 30. It ran its course. Now alarms and cries are resounding through the press — as if some retailers, politicians, and Americans were unaware that the temporary funding increase would cease.

The objective
The Congressional Budget Office estimates that not continuing the 2009 food stamp stimulus will give the government an additional $5 billion in 2014 and approximately $6 billion in the following two years. To put this figure in perspective, though, the Federal Reserve buys over $1 trillion in bonds a year through its seemingly unending quantitative easing policy. Comparably, the $78 billion a year food stamp program only comprises 7.6% of the Fed's bond buying stimulus. Still, spending must be held in check, and the impacts of the food stamp stimulus program's end are becoming more apparent.

The rippling effect
In addition to food stamp users, grocers, convenience stores, and dollar stores are wondering how they will cope with the adjustment. Smaller enterprises like Spartan Stores (SPTN -0.16%), a grocery retailer and distributor in Michigan and Indiana, may take a harder hit than larger, cost-effective stores like Wal-Mart (WMT 0.21%). For example, during its third quarter conference call, Spartan's CEO informed shareholders that the food stamp reduction is a potential reason for concern and that the reduction could be "a meaningful event for us."

Due to its economies of scale, ability to drive down costs, and many locations, Wal-Mart's chief executive for U.S. stores is more optimistic. William Simon reminded investors that because price matters more to food stamp users, Wal-Mart is more relevant than its higher charging competitors, for instance. And, Mr. Simon is right; but, Wal-Mart estimates that about 18% of all food stamp spending occurs within its store.

Running numbers, we see that Wal-Mart generated roughly $14 billion of its $443.9 billion from food stamps in 2012. Moving forward, assume food stamp users do not use cash to maintain their current purchasing patterns, and assume food stamp users who shop at higher priced stores do not begin shopping at discount retailer Wal-Mart. Combining these assumptions with the $5 billion cut to the food stamp program reveals that Wal-Mart will lose about $900 million in sales in 2014. But with a 0.3% increase in U.S. store sales in 2012 and a profit margin of 3.6%,  each dollar is critical for Wal-Mart's bottom line.

After Wal-Mart, about $60 billion is divided among the other companies that accept SNAP funding. Spread out over 248,000 locations, the effects of the decline will likely be minimal for these stores (click here for a list of all stores nationwide that are enrolled in SNAP). 

While time will tell these retailers' fate, they likely won't be going bankrupt any time soon due to food stamp reductions.

The bottom line
The cut in food stamps will lead to difficult times for many Americans; after all, about 48 million Americans utilize the program, 15% of the country's population.

As a nation, we must recognize that stimulus issues do not exist in a vacuum and supply chains, capital, humans, and other resources are involved in the processes. So, if a 2009 temporary increase in food stamp issuances can cause such concern and conflict — even when the deadline is set in stone — what will occur once the effects of other stimulus efforts reach American consumers? Perhaps it's time we mend our national spending habits. And then, maybe, we can rebound. 

Brendan Marasco has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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