Energy Spending Stable

Despite what you might hear on the TV or radio, Americans are not really spending more on energy. While the nominal amount might be going up, the amount spent as a percentage of all expenditures has stayed stable. Below is a chart of Energy Good and Services as a percent of the PCE (Personal Consumption Expenditures). Energy goods and services include not only gasoline and other energy goods, but also of electricity and gas services. However, as I’ve talked about in the past,  a majority of our energy spending is gas spending (about 2/3rdS). So while other components might have an effect, the main trend is going to be driven by gasoline prices, which I likewise have also discussed and have concluded that they’ve been stable.

The chart below starts when the Great Recession officially began, on December 2007. As you see, despite being in a recession, Energy costs climbed to a high of 7% of PCE. This of course didn’t last long as finally the recession started to hit hard in late 2008. We saw a nice climb back and started seeing some overheating in the first half of 2011. But luckily, that was only transitory (as Fed Chairman Ben Bernanke correctly noted at the time) as costs started to drop/not rise again. And lately, over the past 7 months, the percentage has been lower than usual (as we’ve been seeing disinflation which has boosted real wages), despite oil staying around the same levels and natural gas prices actually rising.

A few basis points might not sound like a lot, but the difference between 6.0% and 5.5% can make an enormous difference on the aggregate economy. The median american household income is around $50,000. Just for simplicity’s sake, let’s say income = expenditure (disregarding any saving/borrowing). 6% of that income is $3,000, while 5.5% is $2,750 (The average for the chart is 5.814%). That’s an extra $250 per year per household. Since there are about 115 million households, that works out to about an extra $29 billion in personal disposable income.

While this is small in GDP terms (goes to show you how massive the US is), coming in at only 0.2% of GDP, it is crucial to think about the multiplier effects (side-note: Professor Jim Hamilton has found the 6% threshold to be significant). If I have more income I can go out and buy [Insert good or service here-let’s just assume iPad here]. If I buy that iPad, Apple ($AAPL) might have to hire an extra worker to keep up with the demand. That worker is then receiving more income who then goes and buys something. If with multiplier effects it works out to be 1% of GDP (or more), that is huge for the economy, given how the full stimulus (which was not really stimulus, but this is a topic for another blog) was only about 5.5% of GDP. While this is not going to boost growth from the steady 1-2% we have now to 7-8%, it will surely help on the margin. And we need everything we can get.

Anyway, before I get too off topic (If I have not already!), here is the chart.

(Note: Chart starts in December 2007, so I have marked all the Decembers, not Januarys. This is an updated chart) 




















Source: BEA


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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