Oil Prices Are Lower than Ever — So Why Is the Economy Heading South?
For several months now, people across the U.S. have been enthusing about how cheap it’s become to fuel up their vehicles. Indeed, the era of five dollars being enough to get around town for a while appears to be back. This means that consumers have more money. Here’s the problem: They aren’t spending it. Given that consumer spending makes up 70 percent of the economy, this is a troubling development. Several other worrisome indicators are currently at play too, and the big picture suggests to many economists that the U.S. is sliding into an economic downturn.
One only needs to check out prices at the pump to see that gas prices are the lowest that they’ve been in years. According to the Commerce Department, crude oil prices have dropped by 70 percent since mid-2014. U.S. consumer spending on gas and related energy products has, in turn, dropped by around $115 billion, which is equivalent to about 0.5 percent of the GDP. Despite having all of this extra cash at hand, however, it appears that relatively few people are pumping it back into the economy. Instead, they’re clinging onto it, and this behavior could be the proverbial straw that breaks the camel’s back.
What Are U.S. Consumers Doing with All of the Money That They’re Saving on Gas?
If people are paying significantly less at the pump, why aren’t they spending their windfalls? According to the Commerce Department, U.S. consumer savings increased by about $121 billion in 2015, which is remarkably close to the amount that they’ve been able to save thanks to dropping oil prices. What this suggests is that people are tucking the money that they aren’t spending on gas into savings accounts.
An online poll by Reuters/Ipsos, which took place from January 15 to January 27 and involved 3,068 participants, seems to support the possibility that people are simply in saving mode these days. Indeed, 75 percent of respondents stated that they’ve used the extra money from lower gas prices to cover basic needs like groceries and bills. Very few stated that they’ve used the extra cash to buy big-ticket items, which is precisely what is needed to give the economy the boost that it so desperately needs.
More than 40 percent of respondents stated that they had used some of the money they’d saved at the pump to pay down existing debts. Again, however, this means that the money isn’t being pumped out into the economy. One factor that seems to be having Americans tightening their purse strings is the fear that these low gas prices won’t last. Many have been able to stop relying as heavily on payday loans, installment loans and other short-term loan products, and they fear that a sudden increase in gas prices will put them back in that position. The fact that the economy has fairly recently gotten on an even keel since the 2007-2009 recession surely plays a part in this phenomenon too.
Low Oil Prices Usually Boost the Economy — Why Isn’t That Happening Right Now?
Without question, consumer saving is playing a significant role in the current state of the economy, which appears to be slowing down based on a variety of indicators. However, much more must be preventing low oil prices from helping the economy grow, which is what typically happens. U.S. oil production is largely behind the drop in prices; indeed, the U.S. was the top oil producer in 2014. However, the accompanying dropping prices have wreaked havoc on the oil and energy industry, causing many producers to slash their budgets, operate continually in the red and, in many cases, file for bankruptcy.
Unfortunately, this situation could get worse before it gets better. The International Energy Agency, or IEA, recently stated that the “Oil market could drown in oversupply,” which could cause even more declines in the economy. So far in 2016, a 28-percent drop in oil prices has occurred alongside major slowdowns in global stock markets. Rather than stimulating economic growth, then, low oil prices could be pushing the country closer to a serious downturn or — worse still — another recession. More information about economic issues is available on the finance blog at PersonalMoneyStore.com.