Oil prices have crashed to their lowest level in six years, causing gas prices to tank:
The U.S. Energy Department estimates that lower gas prices will put an average of $750 into the pockets of each American family in 2015. ClearView Energy Partners, which conducted a study for The Wall Street Journal, was even more bullish, calculating that if oil stays at $50 per barrel in 2015, it will translate to an addition $1,325 per household. Thus it's no surprise that many economists predicted a boost to consumer spending. However, new data seems to indicate that cheaper gas isn't boosting consumer demand much.
In my opinion, that's good news for the long-term economic growth prospects of the U.S. economy.
U.S. consumers aren't spending their gas savings
According to the U.S. Department of Commerce, core retail sales, which exclude volatile items such as gas and cars, rose by 0.1% in January, whereas economists had forecast a 0.4% increase.
January's report is especially troubling after December's report showed a 0.3% decrease in core retail sales, reflecting weak spending in traditionally strong holiday sectors:
- Electronics: -1.6%
- Apparel: -0.3%
- Online sales: -0.3%
What explains this decline during the traditionally strong holiday-shopping season, especially when gas prices have declined by such a drastic amount?
Given that consumers are enjoying significant gas savings, it may initially seem puzzling that they've cut back on spending recently -- until you remember that America is a nation saddled by a mountain of personal debt. In fact, between 2000 and 2008, household debt rose by a 14% compound annual rate, illustrating that America's most recent economic boom was largely a result of the housing bubble and consumers using home equity loans as personal ATM machines.
So perhaps Americans are using those gas savings to pay down debt and pad their bank accounts, as they've been doing increasingly since the financial crisis.
As this chart shows, the U.S. savings rate has increased 150% since mid-2007, just before the Great Recession taught us all that living too far beyond our means can be disastrous if we become unemployed in a weak job market.
Where's the extra money going? Debt reduction and savings
A recent survey of 4,500 people conducted by Visa indicated that 50% of gas savings are going toward savings, with another 25% going toward debt reduction. In fact, only 25% of gas savings are being used on purchases such as groceries, clothes, and eating out.
These findings make sense since, according to Wayne Best, Visa's chief economist: "Since the recession, you have a much more cautious consumer."
These findings also back up what MasterCard CEO Ajay Banga said during the company's most recent quarterly conference call: "We haven't seen the extra savings from lower gas prices translate into additional discretionary consumer spending." Mr. Banga did go on to explain that he thinks it might take another month or two for consumers to loosen their wallets and feel comfortable spending a greater amount of gas savings on discretionary goods.
U.S. consumers are starting to think longer-term
It makes sense that a sudden, surprisingly sharp decline in gas prices hasn't spurred consumers to spend much of those gas savings. After all, in 2008 and 2009, gas prices collapsed even more, yet within a year they were back up as oil rallied to around $100 per barrel -- and stayed there for five years. It might take several quarters of cheap gas for consumers to gain confidence that this extra cash isn't just a brief windfall that might be needed later if gas prices rebound to record highs in years to come.
If the job market continues to strengthen -- and, more importantly, if wages start to rise -- Americans will more likely feel confident that the economic recovery has finally reached Main Street, and we might see stronger consumer spending, which accounts for 66% of U.S. economic growth. Hopefully that spending won't come at the expense of increasing savings and pay-down of the debts we've accumulated.
Increasing savings and debt-reduction are best for long-term economic growth
In my opinion, the fact that people are becoming more serious about paying down debts and saving should be celebrated more than stronger short-term spending and slightly faster GDP growth.
Savings are the lifeblood of sustainable investment and consistent economic growth. After we spent a decade living beyond our means, a higher savings rate and consistent debt-reduction may mean a few years of slower economic growth. However, a less indebted America will achieve faster and more sustainable economic growth in years to come.