‘Peak Debt’ At Work: Savings at the Pump Are Staying in Consumer Wallets

From The Wall Street Journal

Americans are taking the money they are saving at the gas pump and socking it away, a sign of consumers’ persistent caution even when presented with an unexpected windfall.

This newfound commitment to frugality was illustrated this past week when the nation’s biggest payment-card companies said they aren’t seeing evidence consumers are putting their gasoline savings toward discretionary items like travel, home renovations and electronics.

Instead, people are more often putting the money aside for a rainy day or using it to pay down debt. That more Americans are saving their bounty at the pump comes as a surprise, because the personal savings rate, after rising during and after the recession, has declined steadily over the past two years.

“We haven’t seen the extra savings from lower gas prices translate into additional discretionary consumer spending,” said Ajay Banga , chief executive of MasterCard Inc., on a conference call Friday to discuss quarterly earnings.

The new data is perhaps the best indication to date that the pain of the recession remains fresh in the minds of many Americans, even as the economy picks up steam.

The Commerce Department said Friday that the U.S. economy grew at a 2.6% annual rate in the fourth quarter. Personal consumption expenditures rose 4.3% at a seasonally adjusted annual rate in the last three months of 2014, representing the biggest increase since the first quarter of 2006.

Also on Friday, the University of Michigan said consumer sentiment in January reached its highest level in 11 years. The closely watched index has increased in each of the past six months, rising 20% since July.

But that positive outlook doesn’t mean consumers feel emboldened to splurge with their savings at the pump, and card-company executives said spending growth would have been higher if consumers had put their gas savings toward more big-ticket items rather than savings.

This year through Jan. 26, the national retail price for gasoline averaged $2.21, according to the U.S. Energy Information Administration. Average gas prices on Friday reached $2.05 a gallon, down nearly 45% since June, when they stood near $3.68 a gallon, according to auto club AAA.

That translates to average savings about $60 a month for the average consumer, according to industry estimates, or more than many workers have received in pay raises in years.

A survey of 4,500 consumers conducted for Visa Inc. in early January found that consumers are hanging onto roughly half of their gasoline savings.

Another 25% is being used to reduce debt, while the rest is being spent on small purchases like groceries, clothing and fast food.

“Since the recession, you have a much more cautious consumer,” said Wayne Best, chief economist at Visa.

Both Visa and MasterCard said in earnings reports late this week that consumers spent more money on their credit cards and debit cards in the fourth quarter, but the lower gas prices put a lid on the companies’ growth rates. Discover Financial Services Inc. made similar statements last week, and it blamed lower gas prices for lowering its growth rate.

“It’s a party at the pump,” says Leo Divinsky of Los Angeles, who says his wife already is using some of his family’s $75-a-week gas savings to pay down credit-card debt.

But the asset manager for a commercial-real-estate developer says he isn’t planning any major spending, outside of more frequent road trips to see his brother in Northern California if fuel prices stay low.

Gasoline spending tumbled 23.8% in January from year-ago levels, according to First Data Corp. which processes electronic payments for more than six million merchants.

Economists say the consumer benefits from lower gas prices tend to accrue over time and that it isn’t unusual for people to stash any initial savings from the pump. If crude-oil prices were to stay at $50 a barrel this year, that would translate to savings of roughly $1,325 per household on gas over the coming year relative to last year’s spending, according to an estimate prepared for The Wall Street Journal by ClearView Energy Partners.

As consumers become more convinced that lower prices “are permanent, they’re more likely to spend it,” said Lewis Alexander, chief U.S. economist with Nomura Securities. So far, “the initial reaction has been to save it.”

Mr. Banga of MasterCard said consumers may need to see low gas prices for two or three more months before they feel comfortable plowing the savings into other types of spending.

Consumers’ confidence about their job situations can also shape how much they are likely to spend. With the unemployment rate falling steadily and employers consistently adding more than 200,000 jobs a month, “the positive effect on the economy should be magnified,” said Torsten Slok, chief international economist at Deutsche Bank .

Mr. Slok isn’t much discouraged by reports that consumers are spending money to pay down debt, either, given concerns that household-debt burdens—while down from their recession highs—are still elevated. “We should be happy that consumers are paying down debt, and we should be happy that consumers are spending,” he said.

Kathryn Grayson, a 23-year-old graphic artist in Asheville, N.C., commutes about 15 minutes to work each way but hasn’t yet decided where to put her gasoline savings.

“Honestly, I should just try to make extra car payments,” she said. “Every little bit helps.”

Savings at the Pump Are Staying in Wallets – WSJ.