How Cheap Fuel Might Save Christmas

As gas prices have experienced another sharp decline in the U.S. over the past few weeks, retailers are hoping that savings at the pump will translate into increased holiday spending. With Christmas just eight weeks away, that’s not a bad bet.

A recent report released by the JPMorgan Chase Institute, which examined the spending patterns of millions of consumers to learn how they are spending what they’ve been saving at the pump, is just the latest in a series of positive reports that suggest the U.S. consumer is about to flex some serious spending muscle.

Although gas prices first started to drop in the summer of 2014, the U.S. economy has not seen the dramatic lift in spending that many economists thought might occur. Part of this could be attributed to stagnant wage growth, while other theories posit that consumer apprehension and fear of a rebound in fuel prices could be to blame for folks keeping that money pocketed.

The fact that gas accounts for only 5 percent of average household spending could mean that, even with significant savings — the Energy Information Administration estimates the average U.S. household will save $700 on gasoline this year — retailers wouldn’t see a significant increase in consumer dollars redirected their way.

However, JPMorgan Chase lends one to a more glass-half-full (or gas-tank-half-full?) perspective, stating that “consumers report that they are using their gains at the pump to pay down debts and save. Our data show they are spending most of them.” The report goes on to articulate that of every dollar saved on gasoline, nearly 73 cents is being spent on consumer goods — with roughly 18 percent of that going to dining out at restaurants and 10 percent to grocery stores. Department stores, entertainment, electronics and appliances also saw a modest boost, according to JPMorgan.

Another area that has seen a steady increase is vehicle sales, which are holding strong even after the heavily incentivized sales of summer have come to an end. It makes sense that lower gas prices would give a boost to auto sales, and that auto lending standards are normalizing as the U.S. reaches near full-employment rates and household incomes are on the rise.

That’s good news for retailers as we head into the holiday season and gasoline prices take another dip: With some Christmas magic, those saved dollars could find their way into retail outlets, instead of bank accounts or being used to pay down debt, as earlier studies and Gallup Polls suggested. On the other hand, more cautious retailers have reason to hold off on loading up Santa’s sleigh just yet.

One of the other interesting findings from the JPMorgan report is that when gas prices decrease, Americans actually end up spending more money on … more expensive gas. Arguably a curious consumer response (“The heck with 87 octane — and also those presents my kids want — Daddy’s got 89 money, now!”), given that — unless a car owner is looking to specifically (and temporarily) treat a knocking engine, fuel octane levels don’t make much of a difference in the average consumer vehicle, despite what gas companies would have people believe.

The New York Times presents an explanation for why, even as gas prices fell nearly 30 percent in 2015, spending on gas only decreased by 16 percent. It’s potentially due to the consumer habit of “mental accounting,” which the outlet analogizes thusly: “If someone is buying rounds of beer at the neighborhood bar, people tend to treat the money they would have spent as ‘beer money,’ and sooner or later they tend to spend it disproportionately on beer. As a result, they end up drinking more beer than they had originally intended.”

With the holiday shopping season closing in fast, although consumers do have more money to spend as a result of fuel savings, retailers (outside the fuel space) have something of a challenge to overcome. Through marketing, they might need to convince octane-level-impressed American consumers that gas is not as valuable as holiday gifts — or, at the very least, beer.