Low Gas Prices Feel Great, But Don’t Help Much
The drop in gas prices has a big psychological impact on consumer confidence, but as a practical matter, doesn’t have much of an impact on consumer spending, says our senior research analyst, Bob Hughes.
That was one of the conclusions of the January edition of Business Conditions Monthly, which the American Institute for Economic Research released this week. Hughes, its main author, shows why:
In the third quarter, consumers spent at an annualized rate of $12 trillion, Hughes said. Within that amount, $62 billion was total energy expenditures, including electricity, heating fuel, gasoline, and diesel fuel. While that’s a big number, it only accounts for about 5.2 percent of consumer spending, down from 5.4 percent in the second quarter.
“It’s really small numbers,” Hughes said. “Any extra cash in consumers’ pockets is good, but this number is just not that big.” But, he added, “It’s great for consumer confidence, they feel they’re getting something good. It’s a lot about psychology.”
While consumers saw fast savings at the gas pump, electricity didn’t drop quite as quickly, because utility prices are often regulated, Hughes said.
The report also points to continued economic growth and low inflation in the U.S. over the next few quarters.
