Relief is coming from an unexpected place for battered American consumers – a weakened economy is putting more money in their pockets as they pay less for staples such as food and gasoline.
Meanwhile, record low interest rates are making it easier for them to finance their homes, which are selling for up to 50 per cent less than they were prior to the 2008 recession.
It’s an upside to a down economy, as falling commodity prices make it less expensive to pay for day-to-day expenses. It may not be enough to fuel a recovery – U.S. consumer spending fell for the first time in 20 months in June – but it’s a small bright spot in an otherwise gloomy outlook.
Considering that consumers account for 70 per cent of the country’s economic activity, any boost is welcome.
“We hadn’t expected it but the consumer could provide some bounce to the economy,” said Paul Dales, an economist at Capital Economics who focuses on the United States. “Their spending power has been under pressure for some time with high prices, and here is some relief. I do think they will spend that extra money quite freely.”
Gasoline prices have fallen as much as 50 cents (U.S.) a gallon in some markets after cresting above $4 earlier this year. With oil down 30 per cent from its most recent high of $114 a barrel, it’s a big ticket savings for many households.
CIBC World Markets said the sharp jump in oil prices over the past year has been “a de facto tax of about $200-billion on job-challenged consumers” that likely undermined GDP growth in the first half of the year.
“Besides dinging the consumer, rising oil prices have also hampered businesses like transport and travel, non-energy resources and autos,” CIBC said in a report.
Grocery prices are also likely to stabilize, said Mr. Dales, as the commodities used to produce and transport food items come down in price amid an economic slowdown. Futures prices for certain foods such as wheat, coffee and sugar have declined in recent weeks.
“As prices went up, [consumers]couldn’t spend as much and were making a lot of substitutions,” he said. “Assuming the turmoil of the markets fade, they could start spending rather quickly.”
One place they may opt to spend is the real estate market.
John Dixon has been auctioning houses for 30 years from his base in Georgia, and he’s never been busier. The weak U.S. economy has kept him supplied with a steady stream of properties to unload to buyers in search of a bargain.
Even as the economy sputters, he believes he’s helping to clean up the market and set the stage for an eventual recovery.
“Most of what we sell we get from the banks, and that’s giving a lot of people a chance to buy properties at affordable prices,” he said. “It’s helping to reset the market and stabilize things a little bit.”
Buyers may be enticed by low interest rates and house prices that are finally showing some signs of stabilizing after the crash. If they decide to put some of their newfound spending power into housing, it could help to pull the U.S. housing market out of its dive, said Queen’s University finance professor Louis Gagnon.
“It helps these people get in on the market,” Prof. Gagnon said. “There’s an irony, of course, that 27 per cent of homeowners are underwater on their mortgages right now and they won’t be helped by rising prices any time soon. But for those looking to buy at these levels, the affordability will be a positive story for many households.”
There is one rather large caveat – only those who feel secure in their jobs are likely to boost their spending. The U.S. unemployment rate remains elevated at 9.1 per cent, and the economy added just 117,000 new jobs in July compared with the 200,000-plus economists suggest would be needed each month to mend the market.
There are 13.9 million unemployed Americans, double prerecession levels. About 44 per cent of them have been off work for at least 27 weeks, just off the record high of 45.6 per cent set in May, 2010.
“If you keep your job – that is a key thing – then ironically this patch of roughness may not be that bad a thing for you personally,” said Benjamin Tal, an economist at CIBC World Markets.