After a 0.9% drop in retail spending in December 2014, Wall Street hoped for better numbers in January, based on rising consumer confidence and lower gas prices. Instead, January retail sales continued the downward trend with a 0.8% decline, according to information released last week by the Commerce Department.
December and January’s numbers produced the first consecutively declining months in a year and a half – however, much of that change may be attributed to falling gas prices (especially since sales data are not adjusted to reflect price changes). Gas stations suffered a 9.3% drop in January sales revenue following a 7.4% drop in December.
With gas excluded, retail spending was flat in January compared to a 0.2% drop in December. Aside from gas stations, only two sectors experienced more than a 1% change in either direction and they cancelled each other out. Sporting goods, hobby, music, and bookstores dropped by 2.6%, neutralizing the 2.6% rise in sales with miscellaneous store retailers.
In a December estimate, the U.S. Energy Information Administration predicted that the average annual household savings in gas would be around $550. Why didn’t the savings begin to show up in retail sales figures?
Personal savings grew from 4.3% to 4.9% in the past month according to the St Louis Fed, so it seems that many Americans are using their gas price windfall to build up savings and emergency funds, as well as pay down debt. America has massive levels of personal debt, and a 4.9% personal savings rate remains low historically, so debt reduction would be welcome.
It is also reasonable to assume that people are waiting to see what happens with fuel prices in the first half of 2015 before feeling comfortable devoting more of their income toward consumer items – especially larger ones that will incur debt.
JPMorgan Chase dropped their first quarter projection for GDP growth to 2.5% based on this report and Barclays followed with a decrease to 2.2%, but most economists don’t seem too concerned yet. Laura Rosner, economist at BNP Paribas, said, “These gains will be spent, eventually. I just think it’s a matter of timing.”
The spending report did contain a few hopeful signs, including back-to-back small increases in the previously hard-hit restaurant industry. Gains may be small, but they reflect consumers’ willingness to splurge in modest ways.
Retail sales may not be obviously reflecting it yet, but economic signs seem strong enough to support improvement in consumer spending as 2015 moves forward. The National Retail Federation agrees, predicting a 4.1% increase in sales for the year in a report released last week. To put things in context, January 2015 sales may reflect a 0.8% decrease from December but they show a 3.3% increase from the previous January.
Consumer spending and consumer confidence are still riding broad upward momentum, and inflation is remaining in check. The job outlook is brighter, with over 1 million new jobs created over the last three months – enough to draw some discouraged workers back into the workforce. January also saw a significant 12-cent increase in average hourly wages, giving hope that stubbornly flat wages will finally rise and increase consumers’ spending power.
Retail sales numbers are likely to rise in the upcoming months based on these underlying factors, while the effect of gas prices should be blunted. Low gas prices will continue to contribute to consumers’ wallets in the short term while the effect of falling gas prices has already made its way through the retail sales numbers. In other words, gas is not going to drop enough in price again to provide a relative downward change in gas station sales revenue for February.
While gas prices are still quite low, averaging $2.23 per gallon compared to $3.32 per gallon one year ago, many experts believe they have bottomed out and should begin rising again soon – if for no other reason, due to the changeover to seasonal gas blends.
Patience, we say. The first few months of 2015 may show flat or slow growth, but consumers’ current savings will eventually make its way back into the economy… perhaps as down payments on new homes later in 2015?
If you are using your gas savings to pay down debt, build a rainy-day fund, or save down-payment money for a new home – good for you! That is the fiscally prudent thing to do. You cannot drive GDP growth and save the economy all by yourself.
It seems that most people understand that lower gas prices are a temporary windfall, and are accordingly keeping their spending habits relatively constant. Consumer spending is still likely to rise throughout 2015 just from the overall brightening of the economy and the improved job outlook, but real wages are going to have rise significantly before we see the sort of consumer spending growth that drives sustained strong GDP growth. Fortunately, we are beginning to see the first signs of a real wage recovery.
Even though consumer spending typically makes up over two-thirds of GDP growth, the January retail sales numbers are not going to change the Fed’s view on interest rates. Keep your investments steady for now, and spend your gas-related windfall wisely.