Despite savings at the gas pump, but consumers have been very selective in where they have allocated the windfall.Elise Amendola/The Associated Press
What happened to the gasoline tax cut?
This is the question everyone is trying to figure out these days, all the more so following that disappointing, flat U.S. retail sales performance in April. And the answer lies in the acutely behavioural component of the economy otherwise known as the personal savings rate.
There is no doubt that U.S. households have received a de facto tax cut because real disposable income has risen at a healthy 4.6-per-cent annual rate since November – call it one part employment gains, one part wage growth and one part energy price relief – and yet real U.S. consumer spending has eked out only a 1.5-per-cent annualized advance. The culprit has been the savings rate, which has risen from 4.4 per cent to 5.3 per cent, and had this not happened, consumer spending in volume terms would actually have expanded at a 4.5-per-cent annual rate and nobody would be lamenting over the lack of verve in the American consumer.
So the tax cut has been there, but for the time being, consumers have been very selective in where they have allocated the windfall, while at the same time increasing their flow of savings in the past four months by more than $120-billion (U.S.), or by a whopping 20 per cent.
But we have seen many episodes in the past that show households don't typically react immediately to a shock to their finances or budgetary circumstances, positive or negative. They first wait to assess whether the shock in question is going to be transitory or durable before rushing to conclusions, which, by the way, is completely rational.
Take the most obvious example – for those of us with long enough memories – which was the comparable supply-induced energy price plunge in the mid-1980s. This was a classic case where households were initially skeptical of the 70-per-cent plunge in oil prices – which moved below $10 (U.S.) a barrel in early 1986 – not sure if it was temporary or not. But as we found out, when the shock proved to be more durable, the initial savings run-up then became dry powder for future spending growth.
Indeed, scholarly research with respect to behavioural economics shows that only when a shock is viewed as permanent and not transitory is the windfall typically spent. This is why economists have to also be part-time psychologists.
Real U.S. incomes, which are among the best measures of economic health, are running at a respectable 4-per-cent annual rate. Consumer spending has lagged behind, indeed, but that is normal – initially – as households wait to assess the durability of the stimulus. So this is a bizarre development only for those who don't know their history as it pertains to the complexities associated with how consumers react to a given shock and the lags that are involved – and how the initial and final interpretation hinges on the perceived permanency of that shock.
It seems to me that at least the equity market gets it, or we wouldn't have seen consumer discretionary stocks outperform the more defensive consumer staples by 500 basis points so far this year.
As the U.S. gasoline windfall that initially went into the piggy bank gets spent in the real economy during the second half of the year, watch for this consumer cyclical outperformance to widen out even further.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.