By Nick Timiraos
American workers have been waiting years for a big raise. That
bump is finally coming--at the gas pump.
If prices were stay at their current levels under $3 a gallon,
the average American household could save $380 over the coming
year, up from $83 since prices first declined this past summer,
according to research firm ClearView Energy Partners. A separate
estimate from IHS Global Insight says the average family could save
$750 over the next year. By comparison, the median U.S. income grew
by just $181 last year from a year earlier after adjusting for
inflation.
The drop in gas prices has already raised retailers' hopes for a
stronger shopping season, since less spending at the pump gives
consumers more to spend on everything from restaurant meals to
clothing and haircuts. The Commerce Department on Thursday is to
release the first look at retail sales for November. In turn, lower
gas prices combined with nascent signs of an increase in wages
could provide fuel for a broader upturn in economic growth.
It wasn't long ago that Rebecca Wagner was paying $80 to fill up
her Dodge Grand Caravan minivan. Last week, it cost $57. In an
economy that's offering few breaks, lower gas prices "have been a
big benefit," said Ms. Wagner, who has nine children at home.
Ms. Wagner, 31 years old, works as a sales executive for a radio
station in St. George, Utah, and has to drive around town for daily
sales calls. "If I'm paying more for gas, then I have to pay more
to work," she said.
Regular gasoline fell to $2.64 a gallon in the U.S. on
Wednesday, according to auto club AAA, near a five-year low. Gas
prices have fallen more than $1 a gallon from their high in June
and are down 60 cents from a year ago, the greatest year-over-year
savings since 2009. AAA estimates that gasoline prices could fall
to $2.50 a gallon by Christmas.
Across the economy, the drop in gas prices could generate a $125
billion windfall for consumers, according to Goldman Sachs
economists in a recent research note. Americans spent $370 billion
on gasoline in 2013.
"It's a fair bet that most of the reduced energy costs are going
to show up as added spending by consumers somewhere," said James
Hamilton, an economics professor at the University of California,
San Diego. Lower gas prices also tend to boost consumer sentiment
in a way "that makes people more optimistic than the added cash in
their wallet seems to suggest," he said.
Gas prices have fallen due to a sustained drop in oil prices. In
the U.S., such declines often have been accompanied by a recession
as consumer demand tumbles. This time around, oil has slid as
concerns mount over increased production of oil amid weaker demand
in China and the eurozone. That could lead the global economy's
deeper underlying problems to weigh on the U.S. economy over time,
offsetting some impact from cheaper gasoline.
Also, surging U.S. oil production, particularly from
unconventional drilling across North Dakota and Texas, means a drop
in oil prices has a thorny underside for the economy. Lower prices
could chill new investment and drive some smaller companies out of
business, which would hurt economic growth.
Still, for as long as the U.S. remains a net importer of oil,
"declines will always be a net positive for the U.S. economy," said
Chris Lafakis, senior economist at Moody's Analytics.
Lower-income households are the most sensitive to fluctuations
in gas prices because they have lower savings. Last year, the
bottom fifth of income earners spent more than 12% of their
after-tax income on gasoline, compared to 3% for the top fifth of
income earners. In 2000, the bottom fifth spent 8.5% of their
income on gas, compared to 2% for the top fifth, according to
Moody's Analytics.
"If lower-income households do have a small windfall from lower
gasoline prices, the chances that they're going to spend that
versus save that is pretty high," said Adele Morris, policy
director for the Climate and Energy Economics Project at the
Brookings Institution in Washington.
Poorer households tend to have older cars that are less fuel
efficient. They also tend to rely heavily on automobiles to get to
work because of the locations of their jobs and the hours that they
work, said Margaret Simms, director of the low-income working
families project at the Urban Institute.
"It absolutely helps. I'm still living paycheck to paycheck,"
said Sharon Riddell, 51, who began working at a machine-part
company in October 2013 after losing her job as a school-bus
dispatcher.
While she was unemployed, she picked up work as a limo driver,
which she continues on weekends. The garage is 26 miles from her
home in Larimer, Pa. She said she fills up her sport-utility
vehicle, a Buick Rendezvous, once a week and is saving around $10
each time. "I'll definitely spend a little more on Christmas
presents," she said.
City-dwellers with short commutes, on the other hand, will enjoy
less of a break. "I'm pleasantly surprised, but I don't spend much
on gas," said Max Savich, a 34-year-old software developer in
Austin, Texas. He drives a Mercedes Benz convertible roadster but
lives just four miles from where he works.
Lower gas prices could have a bigger impact in the South and
Midwest, where spending on gas accounts for a bigger chunk of
incomes. Airlines, refiners, trucking firms, the tourist industry
and restaurants stand to benefit if lower prices are sustained.
Traffic has improved notably over the last two months at Back
Yard Burgers, a dining chain based in Nashville, Tenn., with 68
restaurants in 14 states across the southeast, said David
McDougall, the company's chief executive. "With lower gas prices
putting more money in their pockets, there's a psychological
effect," said Mr. McDougall.
Cracker Barrel Old Country Store Inc. saw a 5% increase in sales
during the three months ended October from the prior year and a
2.5% increase in the average meal check. "The gas price really
speaks to disposable income from consumers," said Sandra Cochran,
chief executive of Cracker Barrel, on an earnings call last
week.
Cracker Barrel, which has more than 600 stores in 42 states,
tends to see stronger sales when more drivers hit the roads because
85% of its stores are located at highway exits and 40% of its
customers are nonlocal travelers.
And lower gasoline prices "can be nothing but positive" for the
U.S. economy in the short run, said AT&T Inc. Chief Executive
Randall Stephenson last week. "That's more money for smartphones
and iPhones," Mr. Stephenson said on a conference call with
reporters.
In Utah, Ms. Wagner's husband works five hours away on a
drilling rig in the oil fields near Duchesne. She said she hasn't
worried about whether the recent drop in oil prices will leave him
with less work and figures he will save on the long-haul commutes
he makes twice every six weeks.
She's not sure how her family will spend any savings,
particularly given rising costs of health care and other basic
goods. With children, "unexpected things happen all the time," Ms.
Wagner said. "Dentists or doctors or whatever the insurance doesn't
cover--that's what money goes towards."
Write to Nick Timiraos at nick.timiraos@wsj.com
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