Much of the money the U.S. Federal Reserve pumped into the economy through massive bond-buying was used to purchase equities, which pushed up their value. The Fed hoped this would enhance households' net worth, induce more consumer and business spending and generate jobs. But the hoped-for “real wealth effect” was muted because equities are held mostly by high-net-worth people who don’t change their spending habits appreciably as their portfolios rise.
Household net worth has risen along with home prices, albeit very slowly. Prices are still 17 percent below their April 2006 peak. Since the start of the recession at the end of 2007, the value of residential real estate has been flat, while stocks are up 37 percent.
Those who thought consumers would immediately spend their energy savings apparently didn’t know that the household savings rate spiked after the tax cuts and rebates in the 2008 and 2009 stimulus measures. Households only later spent some of their windfalls. That’s true today, too: The household savings rate jumped from 4.5 percent in November to 5.8 percent in February.
Savings will probably continue to climb as consumers, who earlier lacked the money to save, use their energy windfall to replenish savings and reduce debt. Baby boomers were negative savers in the 1980's as they established households and spent heavily on cars and home furnishings. Their low-saving habits persisted into middle age, and now they must save with a vengeance or work until they die.
The recent weakness in retail sales also may be the result of intensifying deflation. Retail prices were down 3 percent in February from a year earlier, according to the U.S. Commerce Department. Consumers may be adopting the deflationary mindset that has plagued Japan for two decades. Japanese consumers are trained to wait for still-lower prices before buying. Meanwhile, inventories and excess capacity mount, forcing prices down further. That confirms consumers' suspicions, so they wait for still-lower prices. The result has been slow or zero economic growth since the early 1990s.
Deflationary expectations are a worry for the world’s central banks, many of which want inflation around 2 percent as a cushion against deflation. Their worries are valid: Inflation is running well below target.
History shows that when times are tough, U.S. consumers increase, rather than decrease, their savings. Plummeting energy prices are providing the extra wherewithal. Investors who anticipated purchasing-power gains would lead to greater consumer spending must be sadly disappointed.