There was a lot of talk at the beginning of the year from national economists claiming that GDP growth would expand above 3% because consumers would use their savings from lower energy prices (primarily gasoline) to buy more goods. So far this story has not played out. Retail sales have been disappointing through the first half of the year. Analyzing the details of consumer spending in the first quarter GDP report may provide the clue to what is really going on.
First, we saw that the savings rate rose from 4.6% in the fourth quarter of 2014 to 5.5% in the first quarter of 2015. So, part of the answer is that consumers, at least for now, are putting their gasoline savings into the savings account.
Second, examining the personal consumption component of GDP we see that personal consumption (i.e. consumer spending) contributed 1.31% to total GDP growth. Digging further into the details we see that virtually all of that spending was concentrated in two categories. Spending on housing & utilities contributed .59% and spending on healthcare contributed .69%. This indicates that consumers spent their money on things that they HAVE to buy (i.e. house expenses, utility expenses and healthcare expenses) rather than on things they WANT to buy.
The April Consumer Price Index (CPI) report indicates that trend may not change in the near term. Even though overall CPI rose only .1%, the cost of shelther (i.e. housing expenses) rose .3% and medical expenses rose .7%. Since the cost of these items (i.e. things you have to buy) are rising faster than things you want to buy, more of the consumers’ paycheck and gasoline savings may be consumed by these items rather than discretionary items.
This is a trend that bears watching to see how lower energy prices actually play out in the economy.
1) An article in the Wall Street Journal reported that 40% of households said they used money saved with lower gas prices to pay for basic necessities.
2) Four states have seen insurance providers seeking steep increases in the premiums for their Affordable Care Act (i.e. Obamacare) plans.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.