Are US consumers finally starting to spend their oil windfall?

When the oil price began its steep descent in autumn 2014 it was heralded as the equivalent of a tax cut for the US consumer. Estimates suggested that cheaper gasoline would add an extra US$1,500 to household budgets per year and that the extra funds would fuel spending in shops, restaurants and leisure activities. However, it appears US consumers haven’t read the script.

Consumer spending is steady but hasn’t risen as predicted, while the savings rate has edged up. In fact, during the first leg of oil’s descent, US personal consumption dipped as well. Perhaps there’s been too much emphasis on the extra cash generated by the fall in gasoline prices. Worries about a global economic slowdown, little or no wage growth and the detrimental effects of the lower oil price on the US shale industry, are also likely to have had an influence on keeping the dollars in the wallets.

But is consumer reluctance the only explanation or is there something more behind it? Is there a lag between increased disposable income from falling oil prices and an increase in consumer spending?

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Analysis from Credit Suisse found that over the last 12 months, expenditure on gasoline and motor fuels has fallen by around $55bn on an annualised basis. However, household savings have increased by around $100bn over the same period, more than offsetting the direct savings made via lower gasoline expenditure. In other words, households have saved c.$45bn more than the cash freed up by the fall in gasoline spending.

In this respect, however, the US consumer response does have echoes of the supply-driven oil price fall of the late 1980s. On that occasion, the savings ratio initially rose by around 2 percentage points, perhaps on the basis of a belief among consumers that the boost would be temporary. As it became apparent that the boost would prove longer lasting, the savings ratio fell back and consumer spending increased.

That may happen this time around too. As in 1986, the fall in the oil price is a supply not a demand issue. Although the price of gasoline rallied in the first half of 2015, it has since remained low, perhaps giving US consumers more confidence to begin changing their spending patterns. Compared with the 1980s this lag has lasted longer but, to use a well-worn cliché, ‘it’s different this time’ with a broader array of economic and market issues to consider.

However, there are signs that the lag may be coming to an end. The retail sales report for January indicated that after a temporary slowdown in Q4 2015, consumer spending is strengthening despite the risk-averse environment in financial markets and general economic nervousness. Retail sales rose by 0.2% month-on-month in January, more than consensus expectations.  If gasoline is omitted from the numbers (lower oil prices have dampened gasoline sales in value terms), retail sales rose by a more robust 0.4%, with auto dealers and internet retailers the biggest beneficiaries. The amount spent on new autos is now up 6.9% over the past year. The data also shows that light trucks and SUVs are leading this spending, so it seems the lower gasoline prices are tempting the consumer back to the gas-guzzlers. This is a direct effect of lower oil prices and it would be strange not to see the same effect come through more broadly across all consumer spending.

It’s only a single month’s data but it’s an encouraging sign that US consumers might be starting to open their wallets. Primarily, it signals that household balance sheet adjustment appears to have run its course after a period of spending restraint. That can only be good news in an economy where the consumer accounts for around 70% of GDP. And more importantly, it could reduce both the short-term ‘noise’ around the possibility of, and the actual probability of, a US recession.


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