Lower Oil Prices and Optimism Fueling Consumer Spending

The 4th Quarter saw a slow down of growth from 5 to 2.6% but consumer spending popped up 4.3%. This is good news as 70% of the economy functions from consumers spending. Growth might have slowed in the 4Q but people are more optimistic about their future and this can create positive signs for economic growth in the first half of this year.

According to Sam Bullard a senior economist at Wells Fargo, "Sharply lower oil prices do present downside risk to business investment, but accruing benefits to the consumer in the form of lower gasoline prices should increasingly offset the near-term drag(1)."

As consumers save money at the pump and heat on their homes they are naturally going to spend that extra money somewhere. Americans are not great savers. Nearly 75% of people live pay check to pay check while only 25% have enough to cover 6 months of expenses (2). 

If we aren't going to save that money most likely it is going to be spent somewhere. We love to eat, buy clothes, go to the moves, and take trips. All that extra money will make its way into the market to fuel sales and great economic activity. Watch the restaurant, retail, and beauty markets next quarter.

It isn't all about the money saved from oil as this doesn't consume the largest percentage of American budgets. As optimism rises Americans simply like to spend more money. It is the psychological effect of feeling good about one's life and prospects for the future.

Oil isn't the only thing working in American's favor as hiring is increasing and wages are starting to rise. A few percentage points in income could lead to even more spending. As the economy moves forward we will find that the combination of events coming into play at different times will hopefully keep us happy, optimistic and motivated.

Confidence in the Economy Grows as Holidays Near

The holiday season is nearly upon us and people are a little more optimistic about the economy then they were just a few months ago. People are slowly starting to feel good about their future prospects and the potential for their incomes. According to the Gallop Poll a -6 is a significant improvement over the -20’s experienced throughout the year. 

Economic confidence is a beneficial metric but isn’t a very conclusive one. Much of economic confidence is based in how people perceive the environment and their opportunities within it. New reports and the general impressions of reports does have an impact on economic impression (Barsky & Sims, 2012). Some have called positive economic beliefs part of our animal spirits. 

Animal spirits are more psychological images and impressions than objective data. If you buy more on days when you feel good than on days you don’t then this is your animal spirits coming to play. What we read and how we read the environment will naturally have some impact on our animal spirits. 

This perspective can add up to a lot over time. Cultural-ecological perspective across 45 countries has an impact on economic development (Chou & Loafsson, 2011). How we perceive our environment has an impact but that impact is not a one for one economic tally. Simply feeling confident about the environment may encourage people to spend more but may not impact long term growth. 

Positive consumer beliefs may be part of the holiday season or could a growing trend. As consumers improve their outlook for their own prospects they will naturally spend more over the holiday season. Hopefully this translates into greater sales and hiring throughout the year. Sometimes the economy has a self-fulfilling prophecy spirit where positive impression leads to sales and activity.

Read the Gallop Poll

Barsky, R. & Sims, E. (2012). Information, animal spirits, and the meaning of innovations in consumer confidence. American Economic Review, 102 (4). 

Chou, L. & Olafsson, S. (2011). Confidence as an economic indicator: a cultural-ecology perspective. Brussels Economic Review, 54 (4).

GDP Rises and Consumer Confidence Recovers

The Bureau of Economic Analysis released optimistic data showing a Gross Domestic Product (GDP) increase of 4.2% in the output of goods and services. The new numbers are a windfall compared to the previous 2.1% decline in the first quarter of 2014. The new release of information uses more accurate numbers than previous measurements which help the business community make investment decisions.

The new numbers show an increase in nonresidential fixed investments with smaller numbers in private inventory investment. Other factors influencing the higher numbers were exports, personal consumption expenditures, local government spending, and residential fixed investments. Confidence in the economy may be encouraging purchasing behaviors, state spending, and business investments.

Consumer confidence and consumer spending are associated in economic theory (Ludvigson, 2004). As consumers become more confident about their employment prospects and ability to earn a living wage they will naturally spend more of their hard earned capital on products that improve GDP. The same psychological principles apply to business and government.

We can see this operate in the decline and growth cycles of consumer spending and consumer confidence. Consumer spending dipped .1% in July after rising .4% in June (1). Despite the dip, consumer confidence is rising and future estimates may adjust consumer spending upwards. The polling company GfK showed that despite a consumer confidence decline of -2 in July the numbers moved up to +1 in August (2).

Economic data rests on a battery of measurements to determine future market prospects. If the consumer confidence and consumer spending association is correct we should see an increase in consumer spending numbers for August. A slow beginning to 3Q doesn’t necessarily mean it is going to end slowly as housing and investments recover to support future GDP growth. As with all projections, confounding variables impact the final results. Time is the greatest predictor.

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Ludvigson, S. (2004). Consumer confidence and consumer spending. Journal of Economic Perspectives, 18 (2).