Wednesday, November 11, 2015

What We Have Here is a Failure to Participate

Last time I discussed why the “low” unemployment rate was no longer a reliable indicator of the labor situation in the U.S. Now, as the latest headlines trumpet, the official unemployment rate is dropping to 5%, wow 5%! What is currently wrong with the job market?

-         Not enough jobs are being created to absorb the number of people who want to work.

-         The jobs being created are not “quality” jobs. The wages and benefits are not equal to many of the jobs destroyed by the Great Recession.

-         There is a large, and growing, structural unemployment problem. The skills of the unemployed and underemployed are not a match for the “quality” jobs that are being created.

-         The labor participation rate fell rapidly as a result of the recession and has continued to decrease. Many people have left the workforce and are not currently seeking employment.

Because the labor participation rate directly impacts the unemployment rate and is the most important factor in this right now, it deserves closer examination. A problem with understanding the labor participation rate is that it has become highly politicized. Conservatives claim that all the people are leaving the workforce due to the horrible economy (or discouraged workers). Liberals claim all the people are leaving the workforce because all the baby boomers are hitting retirement age ( or demographics).

An economist at the recent FTR Freight Conference gave the most objective analysis I have heard. He said calculations show that two-thirds of the labor participation loss was due to demographics and one-third was due to discouraged workers.

The first thing to consider is this: even if only one-third of the increase is discouraged workers, it is still a significant number. At some point in a recovery, workers are supposed to reenter the job market as opportunities increase. This is not happening.

The second thing is: I would contend that the two-thirds due to demographics figure is probably overstated. Within the baby boomers, it is not just age that is a factor. During previous recessions, younger workers were laid off in greater number than older workers. The reasons were: seniority rules for union workers; employers not having to cut that deeply due to a less severe recession; and employers being loyal to workers who had worked many years at their companies.

The Great Recession changed all that. Many more of the older workers lost their jobs this time for the following reasons: the work force had become much more white-collar since the last bad recession, so older workers were not protected by seniority rules; the recession was so severe that many companies cut employees based on salary levels; older, more experienced workers had higher salaries, therefore they were cut in greater numbers; and, finally, the loyalty rules have changed in our culture. For years, businesses lamented the decrease in employee loyalty, and during the Great Recession the corporations stuck back.

After getting downsized, a significant number of older workers lacked skills, opportunities, or the desire to start over in a new job, so they have involuntarily retired, found a way to go on disability, or have just dropped out of the workforce and given up hope. These people get counted as “demographic,” but they are very discouraged and trapped by their circumstances.

Also, factor in the people who are working part-time beyond their retirement age because they are either bored or didn’t save enough for retirement. These people are increasing the participation rate not decreasing it, and doing so in the older age ranges. So what we have here is the 70-year old greeter at Walmart who is just relieving his boredom, offsetting the 60-year old person who needs to work but has given up hope. On paper it looks the same, one person doing one job, but the circumstances and consequences are extremely different.

In addition to these “older worker” and “demographic” factors, here are some other reasons for the lower labor participation rate:
This guy would like greater participation!

-         The Affordable Care Act enables more people to receive health insurance without having a job. This provides a disincentive to work that did not exist before.

-         The expansion of the safety net (food stamps, etc.) during the recession also provides a disincentive to work for some people.

-         There is a cultural change taking place reducing the traditional “work ethic” which was stronger in previous generations.

-         Skilled manual labor is not desired or valued by people or society as in times past. For example, trailer manufactures have had problems finding people who wanted to work in factory jobs the past two years.

-         The “quality” of jobs created in this recovery has been poor compared to the quality of the jobs destroyed in the Great Recession. There may not be sufficient motivation for someone who was displaced from a $50,000 white collar job or $40,000 blue collar job to take a retail or service position that pays half as much.

-         The significant “structural unemployment,” unemployed people not having the skills necessary to fill the job openings. This happens at the far ends of the age ranges. Older workers cast out from their long time jobs may lack the technical skills needed for new jobs. Younger workers have amassed huge college loan debt and do not have the skills (or desire) for the skilled manufacturing jobs that are available.

Add this all up, and you have a tremendously dysfunctional employment situation. The labor participation rate is alarmingly low. Economic growth is stuck on “low,” due to the lingering effects of the recession (both psychological and monetary) and government policies that restrict growth, not promote it. When explored in total context, is it any wonder the unemployment rate does not accurately describe the current situation?

Monday, October 19, 2015

The Unemployment Rate Data Is A Mess

I have mentioned numerous times how the impact of the Great Recession has messed with the accuracy of traditionally reliable economic indicators.  This is important because economists and forecasters rely heavily on these indicators to analyze the economy and develop forecasts.

Fortunately, most of the indicators have “reset” to some degree as the economy has returned to a more stable (maybe still not normal) state. It still can be difficult to use some of these depending how long and how badly the recent history was corrupted by the recession.

However, one indicator is still producing numbers that are unreliable and not very useful. It is the monthly unemployment rate percentage.

This is significant because it is one of the most important economic indicators we have.  Consider how the percentage of people employed impacts the other key indicators: GDP, retail sales, government spending, industrial production, etc.

It is also the economic indicator followed by the greatest number of people, and thus reported on most by the press.  Most people have at least some interest in the unemployment rate.  People are concerned with job security, wages, the general job market, etc., and the unemployment rate gives insight to all those factors.  In addition, it is expressed in a single percentage and is perceived to be a simple, understandable concept, although it really is not. 

When the Great Recession hit in full force, it took the unemployment rate from 4.6% (start of 2007) to 10.0% in October 2009, and the number of unemployed people from 7 million to 15 million.  The unemployment rate has steadily declined, as expected during a recovery, and is currently at 5.1%.

The problem is that over the last six years there have been structural and cultural changes to the “labor force” that have significantly impacted the unemployment rate.  Because the unemployment rate only includes people actively looking for work, the labor-force participation rate becomes very relevant.  Unemployment Rate = number of people unemployed and actively seeking work/labor force (employed people + the numerator).

At the start of 2007, the labor participation rate (percentage of the population working or wanting to work) was 66.4%, it is now 62.4%.  This is a significant decline and there are several reasons for it which I will explore in a subsequent post. However, most of the drop is due to aging baby boomers retiring.  All these changes happening in a very dynamic environment creates issues with the unemployment rate.

Prior to the Great Recession, a 5.1% unemployment rate would be an indication of:

-         A strong, vibrant economy
-         Steady wage growth
-         An expanding job market, with many opportunities
-         Many employees changing jobs to become upwardly mobile
-         Great entry level positions to absorb the new college graduates

In 2015 however, we have a 5.1% unemployment rate with what would be considered a lukewarm job market.  The headlines scream “Unemployment Rate Down to 5.1%,” and then the article goes on to explain why this is not indicative of the true labor market and how things are not as good as you might believe.  I am so tired of seeing those headlines and hearing those reports. They are now basically worthless, mere noise in a crowded news world.

People are quick to counter the basic employment rate (U3) with the supposedly better (U6) which seeks to include people working part-time for economic reasons and discouraged workers.  The U6 was 8.4% in 2007, spiking to 17.1% at peak, and is now down to 10%, but something tells me this measurement also does not carry the same weight as in the past.  I do not know it is measurement related, survey related or whatever, I don’t trust the number in historical perspective.

Therefore I consider the numbers unreliable; the only benefit we receive is the direction and the basis point difference.  We know that we have moved 490
The Unemployment rate is not even correct
twice a day!
basis points (according to a mathematical formula) during this recovery, but that’s about all we know. If this is the new normal, maybe the number will become relevant again in a few years.

There is an opportunity for some economic firm or university to try to develop a new employment index that would combine the government data, job growth numbers, help wanted numbers, wage growth, some new survey data, and any other relevant data available.  I think this could be a very useful tool to replace the old, worn-out, employment rate.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Monday, October 5, 2015

There Is No Rice Krispies Treat In The GDP

The U.S. economy registered a surprising 3.9% GDP growth in Q2 after eking out just a 0.6% gain in Q1.  Of course the extreme winter weather (for the second consecutive year) tanked Q1. I did not think there would be a strong snapback in Q2 based on the manufacturing data I analyzed. However, there was a significant snapback, here are some reasons for it:
  • Consumers delayed purchases
    Retail sales of products and services was impacted significantly by the harsh winter. People stayed hunkered down with their furnaces cranked for much of the first two months of the year.  New England was literally buried with snow for much of the quarter.  Consumers resumed consuming in Q2.  They bought stuff they would have bought in Q1. They also went out and spent the money they accumulated in Q1 while cocooning.  Consumer spending increased 3.1% in Q2.
  • Manufacturing was impacted
    There were some manufacturing disruptions, they just happened in other areas of the country this year versus last (the South and New England, instead of the Midwest).  These companies played catch up in Q2.  In addition, the bad weather caused orders to drop for other manufacturers, as demand waned in Q1.  These producers revved up the factories in Q2 in response to stronger demand and to replace inventories (but maybe too many inventories).
  • The Gas Price “Dividend” Finally Gets Spent
    Economists have been baffled because significantly lower gas prices have not caused a jump in retail sales. Consumers waited to see if prices would remain low.  They were not going to spend this extra money quickly when they thought that gas prices could spike right back up.  Now people are more confident in spending this money and it helped boost the Q2 numbers.  My Discretionary Spending Index has been strong since May.  The Restaurant Performance Index has been very strong all year (although it did fall in August).
  • The Employment Situation Continues To Improve
    The economy continues to create jobs, of course not enough. The unemployment percentage is low, of course it can’t be trusted.  Wages are growing, of course too slowly, but it is a net positive.  We have to assume there was a delay in hiring in Q1, so there was some pent-up labor demand filled in Q2.
Will This Economic Rally in Q2 Provide Momentum for the Rest of 2015?
To determine this, let’s review some of the forward-looking indicators:
  • Economic Indexes
    The ECRI (Economic Cycle Research Institute) Leading Growth Index has been sliding since June and went negative in August.  The Conference Board Index of Leading Economic Indicators slowed to “0” in July and was only 0.1 in August. Not good.
  • Manufacturing Data
    Factory Order data has been flat. New Orders (ISM) were holding up until July and then weakened in August and September. Backlogs (ISM) of course have fallen as a result. The Philadelphia FED Diffusion Index tanked big time in September. Thus the forecast is for slower manufacturing growth the rest of the year.  Also, not good.
  • Housing
    Some mixed signals here.  Builder Confidence is still higher than it’s been in many years and very positive. However, recent building permit numbers have not been that impressive.  Other housing statistics are better, but not consistent.  The overall economy has experienced a “choppy” recovery, why would we expect the housing recovery to be any better? So this is positive, but not very reliable.
  • Confidence Indexes
    Bloomberg’s Consumer Comfort Index is down slightly from earlier in the year, and the NFIB Small Business Optimism survey has been relatively flat at a moderate level for the past three months. Very neutral, if that is such a thing.
  • Other Factors
    The Chicago FED National Activity Index is close to “0” indicating current economic growth of around 2.3%.  The price of commodities has dropped to alarming levels.  So neutral, and negative.
  • The Trucking Industry
    FTR forecasts that freight growth will slow in Q4.  This is not surprising based on the manufacturing data listed previously.  The demand for new Class 8 trucks has weakened a bit recently, but remains healthy.  The demand for trailers remains robust, but should follow the Class 8 market at some point soon.  Good, but not great. 
Based on the indicators, the economy did not receive any “slingshot” momentum from the big Q2 GDP. It appears the economy has reverted back to its slow growth mode.  This is confirmed by some economists who say that the economy grew at a 2.2% annual rate in the first half of 2015.
The plate is empty this time!
The Wall Street Journal Survey of economists has Q3 at 2.0% and Q4 at 2.6%. Reportedly, inflated inventories will hinder Q3 some.  So there was a snapback, but there is no snap forward.  No extra positive momentum was generated by the strong performance of Q2.  Just as we should not have been concerned with the low GDP in Q1, there is no reason to be joyous about Q2.  There will be no Snap, Crackle, Pop! this time.
I now return you to your regularly scheduled economic programming. Nothing to see here.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Thursday, September 3, 2015

Green Shoots, Green Shoots in the Housing Market!

In my last post, I stated how the green shoots that FED Chairman Ben Bernanke first trumpeted in March of 2009 were finally appearing in new hotel construction. However, while we were enjoying the summer, while we were lounging at the beach, while no one was paying attention, something wonderful has happened. Housing began its long awaited recovery.

I know you think I’m joking or maybe just making it up.  You’ve heard rumors and hopes of a housing recovery for the past four years.  So much so that you tuned out news on the subject, you’ve accepted the fools who proclaim this is the “new normal.”  But now there are green shoots in the housing market,
green shoots I proclaim!

Early in 2014 I told you not to believe the forecasts of an impending housing recovery, and I was correct. And now I’m saying it is here. Let’s check the numbers to see why.

Housing Starts:

July Report: 1.2M (annual rate). +0.2% vs. June, +10.1% y/y

Trend: We are finally moving up at a consistent, solid rate.  A healthy market now would be around 1.6 million starts.  We are not quite there, but at least we can see the target and it is in reach.  The forecasts for 2016 are still reserved; however, Wells Fargo is in at 1.25M and the Wall Street Journal economic panel is at 1.3M. If the rest of the economy cooperates, 1.3M or more is very plausible.

Building Permits

July Report 1.1M (annual rate). -16.3% vs. June +7.5% y/y

Trend: The July numbers were lower than expectations after a terrific June.  However, the trend is definitely positive and bodes well for increased builds in 2016.

Home Builder Confidence

August = 61, July = 60, August 2014 = 55

Trend: The August value is the highest since November 2005, and that says a lot. A reading of 50 is neutral, so builders are anticipating very good times ahead. 

New Home Sales

July Report: 507K (annual rate). +5.4% vs. June, +25.8 y/y

Trend: Very strong year-over-year and monthly growth.  Finally there is some momentum and reason to feel optimistic.  However, a healthy market is 700K and that still looks to be more than a year away.

Existing Home Sales:

July Report: 5.6M, +2.0% from June, +10.0 y/y

Again, there is finally some positive news after years of inconsistent, sluggish numbers.  The market is still far from healthy, far from normal, but it is moving consistently in the right direction.

Home Inventories

This is the one metric that is not positive.  Existing home inventories were actually down slightly in July and down 5% y/y.  This is confusing to economists, which means there is more than one factor causing this, and there are shifts in market forces which are never clear when they are still changing.  If this doesn’t improve soon, it will continue to constrain the market.
Housing Prices

Core Logic reports prices are up 6.5% m/m and 11.7% y/y in June. Of course this is a function of both increased demand and restricted supply (low inventory). Even so, prices are still 7.4% below the April 2006 peak.

Anecdotal Reports

A roofing contractor told me he is advising people to schedule him now because there will soon be a shortage of shingles due to a significant increase in new home construction.  It seems the manufactures were lulled into a false sense of security after years of sluggish sales and are now rushing to catch up with the rapidly growing demand.  This sounds like exactly what happened in the Class 8 truck and trailer markets as demand suddenly spiked in 2014 and a few years of stable sales.

My realtor friend, Nancy, also reports that instead of sunning herself at the beach during the traditional summer slowdown, she was very busy selling houses.  Her suntan will suffer, but her bank account is looking good.

The Outlook

There are still hurdles for the housing market to clear before it starts to hum.  Wages are not growing, so people are not moving up to bigger homes.  Millennials are not finding suitable jobs and forming households as before, both factors in low-end home sales.  Also, builders have not built enough smaller, starter, homes instead of the McMansions, which people either don’t desire or can’t afford. 

The housing market remains out of sync with the rest of the economy.  This means an economic recession could stop the housing recovery.  We don’t have much history on housing lagging the general economy, so this scenario is difficult to predict.

People are still risk adverse due to the Great Recession.  They are reluctant to take on a mortgage and are willing to pay higher rental costs to reduce their risk.  We, again, saw how the risk factor limited truck and trailer sales until 2014. 

However, we know what happened when the commercial vehicle market finally got over the hump and started to move.  There was a tremendous amount of pent-up demand, and, once that was released, the results were surprising. If this trend repeats in the housing market, 2016 will be a good year, and 2017 could be something special.  Keep an eye on those green shoots! 

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Tuesday, August 11, 2015

Getting Back to Where We Were Before

Is this what I've been dreaming of
Cause I'm needing so much more
I'm just trying to get back where we were before
– Blessid Union of Souls

After the Great Recession some economists claimed the U.S. economy would not suffer the same fate as the Japanese “lost decade,” when it took Japan ten years (1991 to 2000) to recover from economic collapse due to financial market shocks.  No, the U.S. economy is better than that due to blah, blah, blah, blah, blah…

Looking at the freight markets, however, these optimistic economists could be right.  Sometime this year, trucking loads are expected to exceed the previous peak set in 2006. So it only took us nine years, not ten. So, Ha! Japan, I guess we really showed you.

This economic recovery has been so slow for so many reasons that economists can’t figure it out.  We may get a good analysis ten or twenty years in the future, but for now we must play with the hand, the weak hand, we’ve been dealt.

I could now display a slew of charts and graphs showing the impact of the recession and slow recovery, but at some point that would bore and depress you and you would stop reading.  So let’s look at a tangible example of the impact of the recession and where we are in this recovery.

I recently vacationed in Clearwater Beach, a resort town 25 miles west of Tampa on the Gulf of Mexico.  There are many hotels and motels along the beach area that were built over the last several decades.  The natural progression in a normal, growing economy would be that new, more upscale, hotels are always being built and older, deteriorating ones are closed. Very similar to what happens in Las Vegas.

Of course the Great Recession drastically changed the natural course of most businesses and markets, Clearwater Beach included.  I don’t know how many hotels/motels were closed due to the Great Recession, but new construction virtually stopped.  U.S hotel occupancy rates plummeted in 2009 and did not really start to significantly improve until 2014.

Coincidently, the first new hotel since the recession opened last year in Clearwater Beach.  It is a beautiful, multi-story, up-scale hotel with room prices around $300 a night.  So in this risk-adverse, plodding-along recovery, someone took the initiative to invest millions in this new enterprise.

However, as you know, this economy is both fickle and unpredictable, and it appears maybe they jumped the gun on this one.  Business at the hotel is not very good.  I know this because I recently stayed there due to the rooms being discounted to $200 on the Internet travel sites.  This was a great bargain compared to the much older place (in serious need of remodeling) I stayed at last year that costed only 10% less.  In addition, the hotel was not very crowded during my stay, even with the discounted price.

I do expect this hotel to eventually be successful.  The travelers to Clearwater Beach tend to be loyal customers to their hotels, so it will take some time for this new hotel to gain traction. It needs to increase sales soon, however, because two more new hotels are under construction.

One of these was originally scheduled to begin construction in 2007, but has been delayed due to the recession and slow recovery.  The bad news is that
the investor purchased the land at peak prices and has lost eight years of profits due to the impact of the Great Recession. The good news is that he feels confident enough to build it now.  This wasn’t quite a lost decade, just eight years.

Now hotel occupancy rates are reaching the record levels of the year 2000. Expected additional demand is the reason for the new Clearwater Beach hotels.  U.S. commercial construction (including hotels) has been much stronger this year. It is a very encouraging sign to see the construction booms operating in Clearwater Beach. In case you’ve forgotten, this is what a real recovery looks like. Perhaps these are the “green shoots” that FED Chairman Ben Bernanke trumpeted in March of 2009. Hey those
shoots finally got here, just six years too late.

And thus is the nature of this plodding, inconsistent, long recovery process.  The risk now may be lower than say 2010, but it’s still considered an uncertain environment.  Companies and investors that are still risk averse expand and spend very cautiously.  Add it all together, and you get our current economy.

You see this lag everywhere in the economy. In the real unemployment rate, in the workforce participation rate. In the capacity utilization rate.  Like a rehabbing drug addict, the economy is fighting a battle just to get back to where we were before. (song)

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Monday, July 13, 2015

Mid-Year Review: Where Freight and the Economy Are Headed

There is much discussion and speculation about where the economy is headed the second half of the year, so it is an appropriate time to check the freight markets and the leading economic indicators to gain some insight.

Freight Markets

FTR (the undisputed experts on freight) says truck freight (ton-miles, one ton moved one mile) is currently growing slowly and is forecast to grow 1.6% the rest of 2015.  This is slower growth than in the past several years.  Rail freight is actually declining due to fewer coal and metallic ore shipments.  Factor these out and rail freight is very flat.

Data from shows that “load availability” was down 24% from the previous week. This has dropped for four consecutive weeks and is not a good sign.

Freight Market Factors

-        Industrial Production – Recent numbers have been weaker than expected, with a -1.3% estimate for Q2. FTR forecasts around 2% growth the remainder of the year. Better, but not that impressive.

-        Construction – There are signs of life here.  Recent numbers have been positive although commercial construction is growing faster than residential.  However the Building Permit numbers and the Home Builders Confidence Index are both moving up.  There is potential for freight growth in this sector, but maybe not until 2016.

-        Auto Sales – The numbers are high, but peaking.  There is not much potential for significant freight growth here.

-        Exports – The May numbers were not strong.  Exports have been flat for months and are running below last year’s level.  The strong U.S. dollar and tepid world demand are crimping sales.  There is potential for freight growth here, but it’s not likely to happen soon. 

So freight is expected to grow faster than the first half of the year, but still not very good.  There was no “snap back” to compensate for the weak Q1, as I predicted in this blog in March. Let’s see what some indicators say about the economy is the second half.

Economic Factors:

-        General Economic Indicators – The ECRI Weekly Leading Growth Index went positive in mid-April and has been inching up ever since.  The Conference Board Index of Leading Economic indicators has been fairly strong the last two months.  This means the economy does have some momentum going into the second half of the year and the risk of recession (baring a Greek or Chinese upset) in the next 12 months is low.

-        Order Data – New Order data from ISM and the government are mixed. ISM shows solid growth, the government data is flat. The ISM data indicates backlogs are shrinking.  I know that backlogs are shrinking for commercial trucks and trailers after peaking for this cycle in Q1. Maybe other industries are experiencing this as well.

-        Survey Data – The Bloomberg Consumer Confidence Index is back to its March level after recovering from a weak May. Consumers are more hopeful than confident and therefore still are being cautious about purchases.  The NFIB Small Business Optimism has increased some the last three months.  World business confidence is declining however (Moody’s).  Again, there is no sign of retreating but no big push forward either.

-        Sales Data – Retail sales are still subdued and imports are not great either.  My index which measures disposable income spending is actually up 3.7%.  This does contradict my last post that implied that consumers were not spending their “lower gas price” dividend.  Economists expect retail sales to rebound strong in June with some saying “lower, stable, gas prices” have finally had an impact.  This would indicate better growth prospects in the second half of the year.

The Call

It appears the industrial sector is growing slower than the consumer sector and should continue to do so for a while.  It is concerning that freight volumes have slowed because this is usually a good leading economic indicator.  This analysis would indicate moderate growth for the next few quarters.

This is consistent with the Wall Street Journal June Economic Survey.  The GDP forecasts for the second half of the year range from 2.2% to 4.0%, with the average being 3.0%.  This average sounds reasonable, but if I had to bet on the outcome, I’m taking the “under”. 

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Monday, June 29, 2015

Is There A Hole In Our Pocket?

“Now I've got a hole in my pocket, a hole in my shirt, a whole lot of trouble, he said

But now the money is gone, life carries on and I miss it like a hole in the head” 

(Passenger – Michael David Rosenberg)

When gas prices fell dramatically last fall, I enthusiastically predicted it would be a big boost to the economy with more than $70 billion, yeah $70 BILLION, in added consumer spending flowing into the system.  And I even thought the impact would be greater than normal due to the psychological boost it would provide to consumers.  Why did I believe this? Because in the past a drop in gas prices usually produced the same impact as a tax cut and consumer spending increased.

Well welcome to the 2010’s where you can’t rely on some types of historical data to forecast the future.  I have been claiming since 2010 that certain past reliable economic indicators are broken and are still unreliable.  And even then I have made at least two inaccurate predictions in the past year that were based on “rock-solid” history. Those rocks are now crushed stone.

Retail sales have been moderate and inconsistent at best since October and that “huge” economic boost equated to a negative GDP in Q1. So what the heck happened here?

It was expected that weaker crude oil prices would hurt the energy industry, however economists did not think crude would go so low and stay depressed for this long.  It turns out that the energy markets were a significant growth engine for the entire economy and fueling considerable ancillary spending. Once the air was let out of that balloon, the economy began to stall.

However, the bigger question is: What happened to all this money the consumer pocketed from lower gas prices? If we didn’t spend it, where did the money go?  Here is the speculation:

We Saved It
Some economists speculate that the savings rate has increased since the Great Recession.  There were long lasting cultural changes regarding saving and spending following the Great Depression, so the thinking is people’s attitude and behavior have changed due to going through the Great Recession and they are managing their money more responsibly.

I’m not really buying into this one.  This is probably true for a small segment of the population, but I still believe this is a consumption-crazed society and it will take more than just a recession to change that.

We Don’t Think It Will Last

Consumers aren’t spending the windfall because they don’t expect gas prices to stay low.  And to a certain extent they are correct.  The average gas price is now $2.82/gal up from the low point of $1.98, but still 90¢ lower than a year ago.  So maybe this money will be spent on something in the future, but not now.  Technically it is “savings”, but functionally it is delayed spending. Regardless, it’s not being spent.

Nervous Consumers

There have been surveys showing people are getting more nervous about losing their jobs.  This is perplexing based on the fairly positive jobs data this year.  Maybe it was the announcements of future job cuts by some large corporations at the beginning of the year which spooked people.

Regardless, the gas savings has not made consumers more confident.  The UM Consumer Confidence Index was 94.1 in October and only 96.1 now.   It did grow at the beginning of the year but has moderated since.  Likewise the Gallup Economic Confidence Index was -13 in October and -9 now.  If consumers are not confident about the future, they don’t spend money in the present.

Wealthier Consumers Are Not Purchasing Luxury Items

There have been articles detailing this trend.  People were spending recklessly before the recession and now could be reverting to more normal patterns.  After everything that has happened and the derision of the “rich” in the news/political arena, conspicuous consumption is not as valued as it had been.

The Costs of Healthcare Are Increasing

There have been numerous articles and analyses done on the increased costs associated with healthcare. Forget about the cases where the cases where someone’s premium goes up 80%, consider a more normal case where someone’s premium went up $20 a month and their deductible increased by a $1000 at the start of 2015.  Throw in some higher co-pay fees and lower reimbursements for services by your insurance company.

The Affordable Care Act may be far from affordable for most people.  I believe almost everyone was impacted by it.  The insurance companies and doctors are not going to make less money, so they figured out ways to extract more money from the people who already had insurance.  I know I am paying more.  My family used to hit our deductible around May, now we never hit it. I am writing small to moderate checks the entire year for medical bills.

That may have been the plan all along. For people to write “absorbable” checks every month so they don’t realize how much more they are really spending.  The problem is all the “micro-checks” when added together can cause a macro impact on the economy.  Add this impact with the employment issues (29 hour work week, 50 employee small business clause) and the Affordable Care Act may turn out to be a huge drain on economic growth.

That means in January, just about the time people were getting ready to spend their gas dividend (economists say there is about a two month lag from when gas prices fall), their healthcare costs increased, wiping out that savings.  It means we tried to pocket the savings, but there was a hole in this pocket.

Economists calculate the average household savings on lower gas prices will be about $700.  If you spend an additional $700 on healthcare during the year, you break even. If your healthcare costs rise more, you lose.  Increased healthcare costs may be reason for disappointing retail sales in 2015 and may have contributed to the weak Q1 GDP. 

It may have been a fortunate coincidence that consumers got more money from gas savings just as they were required to pay more money for healthcare.  However, we may not be nearly as fortunate if gas prices rise back to previous levels just as the 2016 healthcare increases hit.

“Now I've got a hole in my pocket, a hole in my shirt, a whole lot of trouble, he said

But now the money is gone, life carries on and I miss it like a hole in the head

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)