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The Hidden Benefits of Lower Gasoline Costs

Economic analysts who argue that cheap fuel isn’t helping the economy are looking in the wrong place.

Where have all the gas savings gone? The final data for 2015 shows that, thanks to sharply lower oil prices, Americans spent US$432.46 billion at gasoline stations in 2014, down 19.6 percent from $536.55 billion in 2014. That’s a decline of more than $104 billion — roughly equivalent to the annual GDP of Morocco.

But many analysts are wondering why a gas-guzzling, free-spending economy like that of the U.S. isn’t throwing a bigger party. “This Time, Cheaper Oil Does Little for the U.S. Economy,” the New York Times declared last week, noting that the U.S. isn’t getting the expected boost from gasoline prices that range across the country from $1.60 to just over $2.00 per gallon. While capital spending in the oil patch has fallen, the article noted, the American consumer, who has effectively received a huge tax cut, isn’t acting with the expected exuberance.

This line of thinking misses an important concept to keep in mind as we process incoming data: When one significant trend develops, you can’t just look for its impact in the usual places. You have to develop a view of the entire, broader scenario to size up its true effects.

The conventional wisdom holds that when people spend less at the pump, they automatically, as if by some perfect law of mathematics and economics, spend it somewhere else. But consumers are not automatons. Aggregate economic activity is determined by millions of individual decisions, in which psychology pays a significant role. And I’d argue that lasting changes in consumer psychology since the financial crisis and the ensuing Great Recession are obscuring our vision. As a result, analysts aren’t seeing the full positive impact of lower gas prices on the economy because they’re not looking in the right places.

Analysts aren’t seeing the full positive impact of lower gas prices on the economy because they’re not looking in the right places.

Consumers are simply behaving differently. Take, for example, the numbers on consumer credit. In the last expansion, people borrowed more to fuel consumption as they grew more confident about their prospects and the economy at large. Have more money in your pocket? Borrow more. Revolving credit — i.e., credit card debt — was the fuel that powered consumption. But the mentality changed when the recession hit, and the change has stuck. Revolving credit, which peaked at $1.02 trillion in April 2008, fell to a low of $832.4 billion in February 2011, a decrease of nearly 19 percent. It has since rebounded to $929 billion — the same level as it was in January 2007. Retail sales, however, were 23 percent higher in December 2015 than they were in January 2007. Put another way, the underlying dynamics of the economy have changed such that a much higher level of retail sales and consumption is being supported by a much lower level of revolving credit.

Americans are also doing a much better job keeping up with payments. They’re using their income, and any windfalls they receive (like lower gas prices) to prioritize debt service. Credit card delinquency rates fell to about 2.15 percent in the third quarter of 2015 from a peak of 6.81 percent in the second quarter of 2009. That’s the lowest level, by a long shot, in that 25-year data series. Mortgage delinquency rates stood at 4.99 percent in the third quarter of 2005, down from 5.85 percent in the third quarter of 2014. That represents a decline of nearly 15 percent in one year. The mortgage delinquency rate stands at its lowest level since the first quarter of 2007.

Gas savings are also likely being deployed into a second quiet area: general savings. For years, the rap on Americans has been that they won’t save, that they live for today and borrow to support their excessive consuming habits. That was certainly true through 2008. As this chart shows, the savings rate during the previous expansion, from 2001 through 2007, generally stood at about 3 percent. But it began to rise during the recession, held as the expansion took hold, and has increased significantly over the past year. As this one-year chart shows, the savings rate rose from 4.6 percent in November 2014 to 5.5 percent in November 2015. In the third quarter of 2015, Americans saved cash at an annual rate of $700 billion, compared with a $614.3 billion annual rate in the third quarter of 2013. That’s a 15 percent increase. The amount of the increase corresponds pretty neatly to the decline in spending on gasoline.

Add it all up, and the picture comes into focus. Consumers may be more conservative, more defensive, and more fretful about the long-term picture than they have been in the past. And so when they get a break at the gas pump, they don’t rush out to leverage it up and spend it on stuff. Lower delinquency rates and a higher saving rate may not be great news for mall retailers. But they are good news for the economy at large.

Analysts don’t always fully appreciate the enduring emotional scars people retain after a financial trauma. Coming off a period when so many people fell into difficulty with debt and faced foreclosure, it seems there’s a new resolve to be more vigilant about taking on debt unnecessarily, to focus on prioritizing debt payments ahead of other spending, and to put more cash aside.

That’s where you’ll find the gas savings.

Daniel Gross

Daniel Gross is editor-in-chief of strategy+business.

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