Why lower gas prices haven’t spurred the economy

Scott Tong May 1, 2015
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Why lower gas prices haven’t spurred the economy

Scott Tong May 1, 2015
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Gas prices have been under $3 dollars in most of the U.S. for six months now. Which put a load of unspent money in drivers’ pockets, available to spend. But that spending economic stimulus has hardly shown up.

Drivers who fill up can now leave gas stations with an extra $20 they didn’t have to spend. Where does it go?

“At least a good portion of that has always been spent,” says Dean Maki, economist at Point72 Asset Management. “Consumers aren’t so disciplined they’re unwilling to spend additional income that they get. Typically they do spend at least a significant portion of that additional income.”

But that spending hasn’t shown up in the numbers. Retail sales are tepid. One possibility is the splurge just isn’t here yet. Consumers have yet to be convinced low gasolines prices will last.

“Typically, consumers would want to wait for confirmation that low gasoline prices are here to stay,” Greg Daco of Oxford Economics says. “We still have yet to see the full benefit.”

That may come soon, now that the long winter’s over. But not every economist is expecting that.

“These predictions were wrong,” says economist Ed Hirs of the University of Houston and the oil and gas firm Hillhouse Resources. “There is no direct tie between low gas prices and GDP.”

Hirs argues that money not spent on gasoline has gone to pay off debt, and in some cases buy health insurance required by the Affordable Care Act. The Wall Street analysts who predicted a spending boom have a financial interest in such projections, Hirs says.

“They’re cheerleaders for the market,” Hirs says. “They are not going to stand up and say, ‘Hey this is temporary. Just take your 20 bucks and put it under your mattress.’ That doesn’t sell any shares or bonds.”

 

 

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