WASHINGTON (AP) — In recent months, the stage seemed set for American consumers to do what they’ve traditionally done best: Spend money – and drive the economy.
The lowest gas prices in five years had given people more spending money. Employers added over 1 million jobs from November through January, the best three-month pace in 17 years. Businesses even raised pay in December. Economists had forecast that last week’s retail sales report for January would show a healthy rise.
And yet – to the surprise of analysts – consumers have held their wallets closely.
Even though Americans spent $6.7 billion less at gas stations in January than they had two months earlier, the extra cash didn’t get spent anywhere else: Retail sales, excluding gas, fell slightly from November to January.
The unexpected pullback provided evidence that drivers had used their extra money to further rebuild their savings and reduce their debts – a trend that began after the financial crisis and recession.
In the long run, deeper savings and shrunken debts benefit individual households – and, eventually, even the economy as a whole, because they supply fuel for a sustained flow of future spending.
For now, though, the slowdown in consumer spending likely means the economy will grow more slowly in the first quarter of the year than economists had previously envisioned. Their forecast now is for annualized growth of 2.5 percent from January through March, down from an earlier estimate of about 3 percent.
In the meantime, many Americans are finding more money in their pockets. In January, the national average gas price fell to $2.03 a gallon, according to AAA, the lowest since 2009. Though the average has since risen to $2.24, it’s still nearly $1.10 cheaper than 12 months ago. As a result, the typical household will have $750 more in hand this year, according to an estimate by the government’s Energy Information Administration.
So why aren’t Americans spending more?
One key reason: The deep damage to Americans’ finances from the recession has continued to leave households more frugal than many economists had expected. Americans have shrunk their debt loads but still aren’t ready to spend as freely as they did before.
“Even more than five years after the end of the Great Recession, the U.S. consumer is still exhibiting a degree of caution,” Michael Feroli, an economist at JPMorgan Chase, said in a note to clients.
Americans saved 4.9 percent of their income in December, up from 4.3 percent in November, according to government data. Feroli estimates that the savings rate rose again last month to 5.3 percent. That would be the highest rate in nearly a year and a half.
Some economists note, too, that people accrue savings from lower gas prices only gradually and, if they do step up spending, tend to do so slowly at first. Many Americans also may not feel sure that the low gas prices will last.
Cheaper gas is saving Jon Woll and his wife about $30 a week. Yet they aren’t splurging. Instead, they’re using the extra cash to pay off credit card debt. They do plan to spend more this summer on a longer vacation.
Woll, 44, and his wife live just outside Minneapolis with their 8-year-old daughter. Though gas prices have fallen steadily since fall, they are only now feeling the benefit.
“We’re starting to notice in our bank account that the money just seems to be there, more than in the past,” Woll said.
Economists say it can take three to six months for consumers to spend “found money,” such as a tax rebate or savings from cheaper gas. If that trend holds true, U.S. spending, and economic growth, could pick up in coming months.
“I have no doubts that money will be spent over the next couple of quarters,” said Andrew Labelle, an economist at TD Bank Group.
Auto sales provide an encouraging example. Americans put off replacing their cars during the recession and in the first several years of the sluggish economic recovery. By early 2013, the average age of a car on U.S. roads had reached a record high of nearly 12 years.
But eventually, as hiring increased and economic growth strengthened, more consumers replaced their old clunkers. Auto sales reached their highest level in eight years last year.
Lynn Franco, an economist at the Conference Board, expects greater hiring and rising consumer confidence to soon lift spending and growth.
Greater savings now “frees up money for more spending down the road,” she said.