As gas prices slide, consumers boost spending
Falling prices at the pump are finally fueling consumer spending.
Earlier this year, economists had puzzled over why Americans were pocketing the savings from the sharp decline in gasoline prices, rather than using the money to go shopping or otherwise putting it back into the U.S. economy. But more recent data suggest that people are finally opening their pocketbooks as gas costs continue to slide.
An analysis from research firm Oxford Economics found that retail sales and food services rose 4.9 percent in October from the year before, with lower pump prices a big reason. "The windfall delivered from lower gasoline prices is bolstering consumers' purchasing power this holiday season," Oxford senior economist Oren Klachkin wrote.
A recent report from JPMorgan Chase (JPM) also found that consumers spent 80 percent of the money they saved at the pump. The researchers, who used data from the parent bank's credit and debit cards, concluded that 20 percent of the savings got spent at restaurants and 10 percent on groceries, with department stores and other retail outlets benefiting as well.
Why the turnaround? An economist's rule of thumb is that consumers take six months to spend an unexpected windfall. Translation: A lot of people simply didn't believe that low pump prices, which are down more than 27 percent since June, would remain. After all, not long ago per-gallon costs were substantially higher.
According to the University of Michigan consumer survey, 68 percent of those polled in March believed gas prices would climb during the next year. By October, less than half (48 percent) thought price rises were coming. Their expectations of how much prices might go up in 12 months were modest in light of how much prices have plummeted: In March, they thought gas prices would ascend 28 percent. More recently, they tempered that forecast to a 19 percent hike.
If that did happen, such a rise would represent just a fraction of the reduction that gas prices took from mid-2014, when they averaged $3.98 per gallon. The latest price is $2.05, according to the Energy Information Administration, meaning it has fallen by almost half. The agency estimates that the average household will save $700 on gas this year.
The tumbling gas prices we're enjoying are the result of the Organization of the Petroleum Exporting Countries' decision to push up production levels to maintain the cartel's market share. Meanwhile, crude from North American shale -- which OPEC had hoped to undercut -- continues its prodigious production rate.
Shale output has dipped only slightly amid the resulting worldwide oil glut. Should new supply come from Iran, freed up because of the nuclear pact with the West, prices could fall even further.
The federal government's forecast for average gas prices is $2.33 next year, higher than now, though not by much. But AAA, the motorists' organization, believes the price will keep sliding to below $2 this winter.
Certainly, lower pump prices by themselves are no economic elixir. Gasoline represents a mere 5 percent of total household spending, far below outlays for clothing and housing, the Brookings Institution notes. Economic growth remains tepid, along with pay increases.
But every little bit helps. A year ago, as the gas-price slide was gaining momentum, Federal Reserve Chair Janet Yellen remarked that the trend was "good for families, good for households" because it "boosts their spending power."