With oil prices much lower than last year, why is consumer spending lagging? That is a question that is confounding many economists and financial pundits. Ever since oil prices took a dive in the fall of 2014, just about everyone who follows the financial world has been expecting a significant uptick in consumer spending. So far in 2015, these predictions have fallen flat on their face. The January through March 2015 time period saw a 0.2 percent decline in consumer spending, the first quarterly drop in nearly three years.
There are a number of reasons why consumer spending is unexpectedly lagging during 2015; some obvious, while others not so obvious. Since consumer spending makes up seventy percent of the United States economy, understanding why consumer spending is lagging is important for anyone who has a financial interest in the economy. From its effect on real estate to stock investments to just wanting to know where the employment picture is heading, tracking consumer spending trends is important so informed decisions can be made.
The Reasons Why Is Consumer Spending Lagging
One reason why consumer spending is lagging is because consumers are spending less to run their automobiles and heat their homes since oil prices have come down. While this is good for individual consumers’ budgets, it is having a negative effect on overall consumer spending data. Many people have little flexibility when it comes to putting gas in their car to get to work or turning up the heat to heat their home. No matter what gas and heating fuels are selling for, consumers will pay for them. With prices for gas and heating fuels lower, there is less consumer spending dedicated to these necessities.
Many economists and financial analysts expected the money saved by consumers due to lower fuel and heating costs to be spent elsewhere. But, it appears that many consumers have decided to use the additional money they have saved on fuel to either pay off debts or put it in the bank for a rainy day, or in some cases to reallocate the money to other necessities.
Another reason for the current spate of lack luster consumer spending is rising costs elsewhere in consumer’s budgets that are causing them to reallocate their money away form discretionary spending. Some of these costs are obvious, such as rising rents for those that rent. Some are not so obvious, such as rising health care premiums. Health care premiums might seem like a curious culprit, but the reality is that they have gone up significantly in recent years, as the Affordable Care Act has mandated wider coverage. It appears the rise in health care premiums will continue during 2016, which may further impact consumer spending habits in a negative way in 2016.
The reality is that despite continuously subdued inflation reports in the monthly Consumer Price Index (CPI), many costs are rising faster than the official Consumer Price Index (CPI) value. Cost are also rising faster than average pay increases. Consumers need to make up for their loss of buying power somehow, since hourly earnings increases are not keeping up with rising costs. As a result, consumers appear to be holding back on spending on items that show up as consumer spending.
How To Invest With Consumer Spending Lagging
One thing that has been surprising during 2015 is the fact that many consumer stocks have done well in the face of uninspiring consumer spending data. In particular, Target Corporation (NYSE: TGT) has performed exceptionally well since the beginning of 2015. This makes it difficult to gauge how to invest with consumer spending lagging.
It appears that many investors are buying the sales pitches made by Wall Street advisors that lower energy costs will eventually ripple through the economy and lead to increased consumer spending. That may or may not happen, but it appears that stocks in the retail sector have rallied in anticipation of an uptick in consumer spending.
Consumer spending could pick up later in 2015, especially if oil prices take another dive and hourly earnings get a nice bump higher, but at this point that is speculation rather than informed investing. Later in 2015 and during 2016, consumers will likely be facing higher interest, if the Federal Reserve starts raising interest rates, as expected. This will serve as a headwind that could reduce consumer spending, or at least slow its growth. Consumers with variable rate debts will be paying more each month to their creditors, leaving them with less discretionary money to spend on consumer goods. Also, during 2016, many consumers will be paying higher medical premiums for health insurance coverage; a mandatory personal budget item that has to be offset elsewhere in a consumer’s budget.
At this point, it seems as if most consumer retail stocks are a hold, rather than a buy. With oil prices having retraced 30% of their 2014 losses and with rising budget pressures impacting consumer spending habits, it seems as if the thesis that consumers are about to go on a spending binge is not very strong. Some of the high flying consumer stocks, such as the restaurant stocks that have been on a tear in recent years, should be avoided, since they rely upon continuously increasing consumer spending to fuel their fast growth. If one is already invested in these high flying stocks, now would be a good time to lighten up on such holdings.