Cheap Gas Takes U.S. Spending Index Southward

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Feb 05, 2015

The U.S. Bureau of Economic Analysis provides a detailed report on consumer spending in the United States. Though many may not know this fact, a whooping 75% of the nation's economy was contributed by consumer spending in 1929! Over the next few years, due to a drop in business spending, consumer spending increased to 83%.! Post-World War II, the percentage decreased to a mere 50%. 1960 to 1981 saw consumer spending in the U.S. rise to 62% of the GDP The percentage has increased ever since, even reaching 71%. However, since 2009, a drop has been noted in U.S. spending. Read on to know the reason.

Economic movement

There are many macroeconomic factors that affect consumer spending in the U.S. Taxes, consumer sentiment, government economic stimulus, oil, gas, etc., are a few that can be mentioned. However, even a small change in any of these macroeconomic factors can cause a huge change in consumer spending. Here, we bring you a live scenario of decrease in consumer spending since 2009 due to cheaper gas!

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The above image is a price board of a Shell (RDS.A, Financial) gas station in Novato, California. How does cheap gas price directly affect consumer spending? Low rates at the gas station may give consumers a chance to spend their cash elsewhere! As simple as that! December 22, 2014 saw the price of gas dip to $2.38, the lowest level since May 2009, according to Gabelli Utilities Fd Class AAA. Gus Faucher, a senior economist at PNC Financial Services Group (PNC, Financial), stated that consumers save most of their windfall from low gasoline prices. Since consumer spending contributes around 70% of the U.S. Economic activity, consumer spending is indeed a main driver of growth.

The low gas prices reflected a huge drop in spending on nondurable as well as durable goods. The Institute for Supply Management noted a national factory activity index of 55.1 in December. However, January noted a factory index of 53.5. Hence, the high reading above 50 shows the expansion in the manufacturing sector.

However, the low gas prices can provide a huge lift in consumption, said Ryan Sweet, a senior economist of Moody's Corporation (MCO, Financial). This huge drop, the lowest since September 2009, reflected the low spending of consumers as gas stations along with weak auto receipts. One more important thing to be noted is that the U.S. economy is growing at 2.6% p.a. And the consumer spending is rising at a rate of 4.3% –Â fastest since the year 2006, according to the data presented in fourth-quarter GDP report.

Diane Swonk, chief economist at Mesirow Financial, a financial services firm, said that if oil prices keep falling along with an increase in the U.S. dollar, the price of imports could reduce, which in turn could reduce the rate of inflation and the overall economic activity would thereby be affected. December 2014 saw income increase by 0.3%. Hence, disposable income of households increased by 0.5%, the highest increase since March. Over the year 2014, PCE price index increased 0.7%, the worst since October 2009. Dollar fell against a basket of many currencies while prices for US government debt rose.

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Final cut

A downward trend is observed post 2009. Why? Cheap gas. If gasoline prices continue to drop, key inflation gauge can further slip below the 2% target by Federal Reserve in the month of December. The Fed has time and again specified that this trend is transitory and inflation is expected to be back on track. Let's keep our fingers crossed and hope for the best