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Friday, January 30, 2015

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.

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