From Forbes on May 4, 2015:
When gas prices began to decline late last year, consumers immediately felt the relief during the heavy spending holiday season, and confidence in the economy reached levels not seen since before the Great Recession. As 2015 dawned pump prices remained low, economic sentiment continued at elevated levels, yet consumers didn’t follow through with a “spend, spend, spend” mantra for the New Year.
Conventional thinking would tell us that the positive outlook for the economy combined with the relief from one of consumers’ bigger burdens would equal robust spending, perhaps even leading the U.S. to that “recovery” we’ve been hearing so much about. And while March retail sales didn’t disappoint, this could be attributed to the early Easter this year and perhaps not so much to the extra savings at the pump.
Conventional wisdom may have applied back in 2006; however, post-recession consumers are more of an enigma. Today, shoppers’ new normal is characterized by cautious, planned spending; focus on personal financial stability; and skepticism regarding the macro issues that might upset their personal microcosms. One month of solid retail sales does not a trend make, and one must keep a near constant eye on shoppers in order to gauge which direction they may be headed next.
Yes, consumers are saving money at the pump. While gas prices have risen in the past two months compared to earlier in the year, they currently remain about 30% below where they were a year ago; the Energy Information Administration estimates that the average household will save $550 on fuel related expenses over the course of the year (about $45 a month). But will they pump that money back into the economy through spending? Or will they aim for financial responsibility, paying off existing debt and funneling that extra cash back into their savings? While this isn’t a strictly either/or answer, Prosper’s April insights suggest that consumers’ goals point to the latter, indicating that March’s momentum isn’t likely to carry forward. For this post, we’ll take a closer look at some of the reasons why consumers’ recent gas price savings aren’t a sure bet for solid retail sales.
Reason #1: Intent to save and pay off existing debt is alive and well.
With a few extra dollars in their pockets and not in their tanks, consumers’ intent to save and pay off debt is alive and well. Since the New Year, shoppers’ plans to cushion their savings have increased over 2014 comps. While year-over-year growth in paying down debt has been less consistent, consumers’ debt reduction goals have accelerated as of late, rising more than 4% over April 2014. Consumers were also more likely to direct tax refunds toward debt and savings this year compared to last. And while intent and follow-through are certainly two different actions, our April intel points to consumers exercise fiscal constraint, giving them reason to pause before spending.
Reason #2: Shoppers still feel financially vulnerable.
While shoppers overall are in a better position to spend compared to 2008 or 2009, many feel that they just aren’t out of the woods yet. In April, one out of three consumers (34.6%) indicated that they felt “somewhat” or “very” insecure about their overall financial standing; this figure rose to nearly one in two (48.3%) among lower income earners. While current prices at the pump are likely contributing the greatest relief to those earning under $35,000 per year, it’s clear that for many, gas price savings would be better spent on building a more solid financial foundation.
Reason #3: Consumers’ spending plans remain inconsistent.
Spend one month and save the next: perhaps this is a guilt trip imposed by skittish, skeptical consumers “just in case” the economy sours, the government shuts down (or finds itself at the precipice of a fiscal cliff or debt crisis), or prices at the pump ratchet back up over $3 a gallon. Let’s face it: consumers have had a lot to deal with in recent memory, and this turmoil will be hard to move past.
According to Prosper’s Consumer Spending Forecast (a composite look at spending intentions among 20 major retail categories), consumers’ overall plans to spend in March were relatively bullish; comparatively, April spending intentions cooled. On the bright side, current spending intentions are still gaining year-over-year, though this growth is more likely to come from staples (think groceries and personal care products) than discretionary categories. In a nutshell, it appears that consumers are more practically-minded when it comes to spending compared to March, which buttresses their conservative mindset regarding savings and debt repayment.
Each of these points underscores the importance of recognizing and tracking the fiscal priorities of these new, post-recession consumers, who aren’t relying on their old spending habits in the current economy.