Consumption of goods accounts for 23% of US GDP, so at first sight this slowdown threatens growth. But since falling petroleum prices have been responsible for almost all of the slowdown of the last few months, the deflators will take care of that impact as far as GDP growth is concerned. The key word, however, is 'almost': beyond the simple price impact on the headline nominal numbers, the sudden fall in petroleum prices - down 25% since September - has another less obvious effect on consumer behaviour. If the fall in gasoline prices is experienced as an unexpected windfall by the consumer, one would expect an initial phase in which the fall in prices is an unexpected windfall which initially (and inadvertently) saved, only to be spent subsequently when the consumer adjusts to his/her new and larger budget. In other words, one would expect a ‘J-curve’ effect.
Is this happening? The first crucial question to be addressed is: at what point would one expect the fall in gasoline prices to take consumers by surprise?. If the answer to this is: ‘when it falls significantly below the range recently experienced, then this is not difficult to spot. The chart below shows a fairly clear range sustained between January 2011 and October 2014, in which the price of regular conventional gasoline averaged $3.48 a gallon, with a standard deviation of 20 cents. In this chart the dotted lines show the two standard deviation level, which at the lower boundary comes out at $3.07 a barrel. One might speculate that above this level, the consumer would be unlikely to react to price fluctuations, but when it dived sharply below that, it represents a clear break from recent experience. According to Energy Information Administration that happened only in the last week of October. So it is only in November, and more obviously in December that one would expect any J-curve effect to be developing.
But later, that savings rate is likely to retreat again as households adjust their spending to their newly-expanded budget. When petroleum prices stabilize, so will that portion of retail sales. Meanwhile, as consumers adjust their spending to reflect the new lower petroleum prices the personal savings rate falls and ex-petroleum sales accelerate beyond the current 0.3% mom run-rate, and probably, for a while, beyond the longer-term 0.4% rate. Looking back, we will see the J-curve effect at work.