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Peter Atwater: Why Falling Gas Prices Did Not Boost Consumer Spending


The conventional wisdom surrounding falling gasoline prices should not be believed.

"Lower gas prices will translate into stronger consumer spending."

"The drop in gas prices represents a $100 billion tax break for the consumer."

These were the memes espoused by television pundits and financial magazine economists up until Friday, when MasterCard (MA) rained on their parade and reported that customers are not spending their gas savings.

While the MasterCard news must have come as a shock to many, I wasn't at all surprised by the news.

I have been watching the Gallup Consumer Spending Index closely.



As the charts above show, there has been no distinguishable change in spending behavior year on year despite a 50% drop in oil prices and pump prices approaching $2.00 per gallon.

The pundit and economist community ignored the role of confidence in decision making. Just like they did when they forecast that exceptionally low interest rates would spur consumer credit demand, economists failed to consider the mood of the people making decisions.

When confidence is low, lower prices and low interest rates don't automatically translate into higher demand.

While confidence is well-above its 2009 lows, the American consumer is in no mood to spends new gas money savings. As USA Today pointed out last week, the retail investor's favorite investment is still cash. Then of course, there are rising health care insurance premiums.

What Shell (RDS) and Exxon Mobil (XOM) may giveth, Obamacare taketh away.

But these aren't the only problems economists face.

When it comes to confidence, perception is all that matters. Lower gas prices have a very high perception hurdle to overcome before they translate into higher spending. 

While theoretically helpful, the sudden drop in gas prices suggests volatility a
nd uncertainty, not permanence. So does history. $4.00 per gallon gas prices are still seen by many as normal. It will take a long time before that perception fades. 

Then there is ISIS and the media's coverage of troubles in the Middle East. While the region is no longer the vital source of American gasoline it once was, the long-term perception associating high oil prices with trouble in the Middle East will be hard to break with a constant stream of worrisome news headlines and videos. You can also add Russia to the list of troubled oil linked countries.

Finally, I would not discount the message the airline industry is delivering to consumers. Thanks to the industry's current oligopoly, lower oil prices won't translate to lower airfares. It is shareholders and creditors who will benefit instead. 

While this aspect will be ignored by economists, it shouldn't be. For the low-end consumer, it is yet another example of how they can't catch a break. 

The more consumers see the deck stacked against them, the bigger the confidence headwind and
associated drag on spending.

And while it is not today's business, this is yet another "straw" of our extreme form of capitalism being placed on the underconfidents' back today.

This cartoon appeared on the editorial page of our local paper late last week:

Economists and Wall Street Journal writers talk about a "two-tiered economy". 

That is not how Main Street sees it. And unless something happens soon, the camel's back will break.

To be fair to economists, consumer confidence has risen sharply since gas prices fell.

As the chart above shows, from early July 2014 to early January 2015 Gallup Economic Confidence rose from -23 to +8. Consumers are feeling better.

But for today's consumer, feeling better comes from paying down debt, putting more into savings, and having more financial breathing room.  Better means less bad. Last July, far more people felt bad about their economic prospects than felt good. Today, those two groups are about even sized.

The US consumer is far from the +56 level of confidence that was experienced in the late 1990's.

The next time you hear an economist suggest that something will be good or bad for the consumer, consider the consumer's current confidence level first. It affects how real people think and act. Their feelings and their level of confidence determine their preferences, decisions and actions, and those feelings are filled with biases and memories that most economic models fail to appreciate.

From a spending perspective, the drop in oil is dud. 

It will take a considerable improvement in economic confidence, geopolitical stability, a broader pass-through of the savings, and time before we see a real impact.

Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world."  -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation

Twitter: @Peter_Atwater
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