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10 Dec. 2015 | Comments (0)

Flash back to the summer of 2014. Sunny skies, warm days, and consumers were paying, on average, $3.70 for a gallon of gas. But an autumn chill brought a rapid decline in the price of a barrel of oil that carried through the winter months. By the winter of 2015, the price of a gallon of gas had fallen considerably and was hovering slightly above $2.00 (Chart 1).  Consumers suddenly found themselves with extra cash, and it didn’t take long for the question to emerge: what were they doing with all the “extra” cash?? Would they spend it and help boost consumer spending? Or would they save it, and maybe even use it to help reduce their debt? Could the US economy be the beneficiary of a prolonged period of declining gas prices?   Lynn Chart one   Given past consumer behavior, one would assume that history would repeat itself and the majority of consumers would be spending rather than saving their newly found discretionary income. But, that was not the immediate case. It appeared that consumers had become more frugal since the Great Recession.  In fact, back in March 2015, when we polled consumers as part of our Consumer Confidence Survey®, they were about as likely to have saved their new found discretionary income as they were to have spent it -- 30 percent versus 32 percent, respectively.  Consumers were skittish. Caution and restraint prevailed. Americans loved the lower gas prices and the savings, but they weren’t spending. By the time spring had sprung, and we reached the peak driving season, the price at the pump had risen to about $2.45. While this was up from the winter lows, it was still significantly below 2014 prices. By that time a feeling of permanence began to sink in. Not only had consumers’ perceptions changed, but so had their behavior. By September, when we polled consumers once again as part of our Consumer Confidence Survey®, a third said they had spent the savings, and less than twenty percent now said they were saving or reducing debt with the extra cash (Chart 2). The overly cautious mindset was changing and consumers began to loosen the purse strings.   Lynn blog chart two   Why the turnaround? The answer is relatively simple. Consumers’ perception regarding gas prices had changed over the past six months, and as a result so had their behavior. Last spring, more than nine out of ten consumers surveyed said they expected gas prices to increase by the summer. And, gas prices did increase, peaking at a little over $2.80 a gallon before they began retreating in early Fall. Consumers were apparently skeptical that the rapid and steep decline experienced in gas prices earlier in the year was going to be sustainable. The vast majority felt that the upward trajectory in prices would likely continue and it would only be a matter of time before they found themselves paying well over $3.00 a gallon once again. Thus, the perception was that the discounted prices were only temporary, and therefore there was no desire to alter one’s behavior. By September, however, consumers were still enjoying the “low” prices and a shift in sentiment began to take shape. When asked what they thought would happen to gas prices by year-end, less than one out of every two said they foresaw an increase. This is quite a turnaround in sentiment from March. And, an additional 29 percent said they anticipated prices to remain the same, while more than 20 percent expected further declines (Chart 3).   Lynn chart three   Gas prices are once again heading lower and expectations are they will remain low into next year. With the majority of consumers convinced that low prices are here to stay, and more prone to spending than saving, this should help provide a much needed boost to holiday sales. The stage may be set for consumers to do what they have always done best – spend money. (Link to holiday press release).
  • About the Author:Lynn Franco

    Lynn Franco

    Lynn Franco is director of economic indicators and surveys at The Conference Board. Franco is responsible for overseeing the production and release of all global indicators for The Conference Board, i…

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