Gas prices are down 43% since June! This will pump $300
billion in the economy this year! Households now have an extra $1,000 to spend
in 2015. Consumers are going spend this windfall like crazy people! So the
first economic report is issued that reflects the big economic boost and Q4 GDP
comes in at 2.6%! Whoa, wait, 2.6%? That’s it?
What the heck happened? Where's the beef?
Part of the explanation (not related to consumer spending)
is:
- Other parts of GDP were much weaker than
expected in Q4, especially equipment spending which actually declined.
- GDP had grown at 4.6% and 5.0% the previous two
quarters. Since this is anything but a strong and steady recovery, a “slower”
quarter should be expected.
- Economic uncertainty in the world markets
impacts exports and increases risk
Part of the explanation related to consumer spending is:
- Wage growth is more important than gas prices to
consumer spending and this has just started to show positive signs.
- Gallup says 30 million people still want to find
full-time jobs. That will take 10 years
at a 250,000 jobs a month rate.
- A survey by Visa indicates consumers are only
spending 25% of their gas savings.
But the news is still good:
- Consumer spending did increase 4.3% in Q4
- 55% of the Wall Street Journal’s Economic Panel
believes lower gas prices will help the economy “Slightly” while 33% believe it
will help “Considerably”.
- Consumer Confidence continues to climb, The
University of Michigan Index of Consumer Sentiment rocketed to 98.1, its
highest reading since 2004.
- Retail sales were down in December, but were up
5.3% year-over-year.
Remember, lower gas prices are only estimated to increase
GDP by around 50 basis points in 2015, so this is consistent with the 55% of
the WSJ economists. But I do agree with
the 33% who said the benefit would be significant. This is due to more than numbers, it is
greater than a spreadsheet calculation.
There is a major psychological boost provided by lower gas prices and to
people who have been shell-shocked since the Great Recession it is much needed
therapy.
Our obsession with gas prices is a cultural phenomenon. It is 90% emotional and 10% rational. We believe we deserve cheap gasoline and we
are not happy when the price is above
our expectations. This effect is so encompassing
that when gas prices fall, that approval ratings for POTUS go up. Those sky-high consumer sentiment scores are
climbing because of job and wage growth, but the biggest factor is low gas
prices.
Cheaper gas prices will help us get back to some degree of
normal. People will buy more stuff, buy
more houses, add more jobs, and take more risks because they just feel more
comfortable. It a word, it creates
optimism and this has been lacking since 2007.
And the boost in consumer spending should come soon. Analysts that follow this say it takes a few
months of lower gas prices before the spending increases start. With consumer confidence high, expect strong
January retail sales numbers. (Didn't happen)
Discretionary spending is a good indicator of economic
health and these lower gas prices are creating more discretionary income. I follow the “Sporting Goods, Hobby, Book,
Music” and the “Clothing and Clothing Accessories” sections in the Retail Sales
numbers because these are the purchases consumers eliminate during bad times
and increase during good times. The news
here is very good.
The Sporting Goods etc. category started accelerating in
September and now has four straight increases of year-over-year growth. The Clothing category saw a 5.3%
year-over-year jump in November after being basically flat for many
months. December’s gain was 3.8%.
Even with consumer spending starting to hum, don’t expect a
big gain in GDP. Business investment is
expected to be tepid and the WSJ Economists panel is only forecasting growth of
3.0% in Q1 and 2.9% in Q2.
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.)
