Our economy depends heavily on consumption, with approximately 70% of U.S. economic activity on what Americans spend.
This is the time of year when we start paying close attention to Wall Street expectations surrounding holiday sales events — Black Friday has crept into Thanksgiving Day and “Cyber Monday.” People line up for bargains everywhere from Wal-Mart to Best Buy or nervously sit by their computers at noon on Monday hoping to be one of the first 500 people to get the deal of the year on popular shopping websites. On TV, business networks focus heavily on holiday shopping because it provides such a good indication of the strength of the American consumer and, consequently, the economy as a whole.
But what about the less glamorous things that people buy? Food, gas, and utilities all come to mind. How might changes in what people spend on these essential items impact the economy?
Today, as I was driving from Roanoke to Lynchburg to meet a client, I noticed gas as low as $2.89 a gallon at a couple of stations on Route 460. It wasn’t long ago that gas was approaching $4.00 a gallon. At roughly $1.00 per gallon cheaper than recent highs, the average person would save close to $20 per fill-up. Depending on how much someone drives, this could save roughly $40-60 a month. According to CNN, for every 5 cents per gallon Americans save on gas, they pump an extra $8 billion into the economy in other forms of consumption.
Taken individually, then, an extra $40-60 a month might not sound like a lot. But on the aggregate, the billions of dollars in savings have an indirect but significant impact on many parts of the economy, including jobs. Consider this: if people save money on gas and buy more goods and services, it makes sense that the manufacturers of those goods and services will have to hire more people to accommodate increased demand.
As the economy continues to claw its way back from the deep recession of 2008-2009, we are encouraged by any economic tailwind we can find. Lower gas prices should translate into the consumer having more money to spend this holiday season, which in turn would be very positive for the economy.
In future installments of this blog, we’ll focus on the impact on the economy of current food and utility prices. Stay tuned.