February 13, 2015
That’s not my line, it’s the headline of an AP article in the Washington Post. The exact words were, “cheaper gas lowers retail sales; spending up elsewhere.” Yes folks, once again we see the march of surprised economists.
The immediate cause was a report from the Commerce Department showing a drop in retail sales of 0.8 percent in January that followed a drop of 0.9 percent in December. These declines do not quite fit with the story of a soaring economy led by a consumption boom. So now in the hunt for culprits, this AP article has apparently fingered lower gas prices.
Back in the good old days before this report was released we used to think that lower gas prices would be a spur to consumption as it freed up money for other purchases, but I guess we have an audible here:
“The modest gain suggests Americans are still cautious about spending their windfall from lower gas prices. …
“Economists were disappointed by the weak showing, but most expect that consumers will eventually spend much of the extra cash left over from lower prices at the pump.
“‘With lower gasoline prices leaving households with more to spend … the labor market on fire and consumer confidence back at its pre-recession level, we had hoped to see a much stronger performance,’ Paul Ashworth, an economist at Capital Economics, said in a note to clients.”
There are two important data points that were apparently missed by the surprised economists. First, the labor market is very far from being “on fire.” The percentage of unemployment due to people voluntarily quitting their jobs is still at extraordinarily levels. This is a key measure of workers confidence in the state of the labor market. Nominal wage growth has been just 2.2 percent over the last year, virtually unchanged from the prior three years.
The other data point apparently unavailable to surprised economists is the saving rate. Contrary to what they routinely assert, the saving rate is actually quite low, meaning that consumption as a share of disposable income is already quite high. People have need to save, for example for things like retirement. Some folks may have heard stories about the retirement income crisis. This refers to the fact that workers approaching retirement no longer have defined benefit pensions and have little savings.
For this reason, we should not expect some big surge in consumption going forward. If we expect to see a sharp uptick in growth we will have to look to some other component. Since there ain’t many choices out there (the textbook says GDP is equal to consumption, investment, government spending, and net exports), some of us are less optimistic than the surprised economists.
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