ShareThisBy JONATHAN B. COX
Sunday, November 12, 2006
Drivers are richer than they were in August. The reason? They're burning less money in their gas tanks. Nationally, prices at the pump have fallen about 77 cents since reaching a high of $3.03 in August. Those pennies have a sweeping effect on the economy.
"It functions like a giant tax cut," said James Smith, chief economist for Parsec Financial Management in Asheville, N.C. "It's cutting the cost of transportation, heating, getting to and from work, you name it."
Indeed, the drop in fuel prices _ if it holds _ could translate into an extra $21 billion during the last three months of the year, based on figures from Global Insight, a research firm in Lexington, Mass.
Although that's less than 1 percent of total consumer spending, it's money with real meaning.
Nationwide, optimism is rising as fuel prices fall _ even as other issues weigh on the economy. Consumer confidence is at the highest level in more than a year. And the sentiment is translating into more spending. In September, retail sales, excluding service stations, rose at three times the pace in August.
The increase could not come at a better time for consumers, retailers or the nation's economy.
Stores need the momentum heading into the holiday season. Many count on the period for a quarter or more of their annual profits, as shoppers buy the hottest toys, gadgets or other gifts.
"Any reduction in money out of pocket for gas ... anything like that, it will certainly spur them to their nearest favorite retailer," said Frank Jolly Ragsdale, owner of Jolly's Jewelers & Silversmiths in Raleigh, N.C. "It just makes me cheer every time I go to the pump."
Without a fuel price retreat, the outlook could have been bleak.
Economic growth is slowing, brought on by higher borrowing costs and a cooling housing market. Federal Reserve officials, who set monetary policy, raised interest rates 17 times between June 2004 and June to fight off inflation and deflate a housing bubble.
Their actions pinched consumers, especially some homeowners who relied on soaring home values for fat loans to fund purchases.
As interest rates rose, the extra money vanished and buying power waned. Given that consumer spending accounts for two-thirds of total economic activity, reductions matter.
Falling gas prices helped offset the forces. Inflation fears subsided as energy prices declined, prompting the Federal Reserve to stop boosting rates.
Consumers dumped less money into their tanks, raising disposable income. Consumers gain an additional $100 million a month for every sustained penny decline in gas prices, the Global Insight calculations show.
Perhaps as important, though, is the psychological effect.
"People feel a lot better when prices are going down for gas," said Harry Davis, a professor at Appalachian State University and economist for the N.C. Bankers Association. "You're reminded of it constantly."
The poor benefit most from price retreats. Those in the bottom 25 percent of wage earners spend 9.2 percent of their incomes on energy expenses, according to research by economists at the Federal Reserve Bank of Chicago. The top quarter spend 6.7 percent on energy.
Skeptics wonder just how long prices will stay this low.
A recent Washington Post-ABC News poll found an almost even split between people who cite market forces and those who thought the decline was linked to political factors, including a desire by the Bush administration and Republican Party to shape the November elections.
Oil prices, which are closely tied to gasoline, have fallen precipitously for a variety of reasons. Supply rose and demand fell. Middle East concerns _ about violence in Israel and the potential for problems in Iran _ that flared during the summer eased. A quiet hurricane season let refineries keep humming.
Predicting where gas prices will go next, though, is almost impossible.
The most immediate influence on prices could come from the Organization of the Petroleum Exporting Countries. OPEC is preparing to reduce oil output by 1.2 million barrels per day, cutting supply to boost prices.
No matter where the trends might lead, some effects of higher gas prices from earlier this year are likely to linger.
Companies that added surcharges or raised prices as fuel costs surged have been slow to reverse them. No one wants to make a bad bet that prices will stay low.
