What gas dividend?

Oil (and gasoline) prices have crept off their lows; they’re up about 25% this year, though they’re still well below year-ago prices. But many analysts have been scratching their heads wondering why the decline in energy prices hasn’t done more to goose up retail spending. It may be that's not really much of a conundrum. 


Here are several ways of making that point. First, there’s the graph above, showing the annual growth rate in nominal expenditures on energy and all other forms of consumption from the national income accounts. If energy prices could add to or subtract from other forms of consumption, you’d expect the two lines to look more like mirror images. In fact, they move more together than apart. The correlation coefficient between the two series is 0.43. Lag the non-energy spending a year, on the supposition that there might be a delayed reaction time, and the correlation coefficient actually falls to 0.28.

Moves in energy consumption are overwhelmingly dominated by price. The correlation coefficient between the annual change in the gasoline price and energy expenditures is 0.97. (That’s made even more remarkable by the fact that more than a third of energy spending is on services like electricity, which are not priced like gas.) While people may drive more or less, or raise or lower the thermostat, based on price movements, it appears they don’t change their behavior all that much. They just take the price—and it doesn’t seem to have much effect on other spending.

One gets similar results looking at the BLS’s Consumer Expenditure Survey (often abbreviated CEX, so as not to confuse it with Current Employment Statistics, the official name of the payroll survey). The CEX can be volatile, and dependent on the unreliable memories of the surveyed in describing their spending habits, but it’s still the best household-based measure of expenditures we have—and it allows for fairly detailed demographic analysis.


As the first graph above shows, we don’t find the mirror image between energy and non-energy spending growth that you might expect in the aggregate. The correlation between energy and non-energy spending growth is 0.28—positive, not negative. And the story is similar when you look at poor (bottom quintile), middle-income (third quintile), and affluent (top quintile) households. The correlation weakens the higher you go up the income ladder (0.52 for the first, 0.42 for the third, and 0.14 for the fifth), but they remain positive for all five. 

Not surprisingly, there’s a tight relation between income growth and spending. A regression of the annual change in non-energy spending in the CEX on the annual change in household income yields an impressively high r2 of 0.53. So the “mystery” of why lower energy prices are not translating into higher retail spending may not be a mystery at all. The best explanation of tepid retail growth is tepid income growth.