Consumers also increased their saving rate modestly, perhaps sensing that the drop in energy prices was only temporary. The rise in the saving rate is a comforting sign for the health and durability of the economic recovery, providing the consumer with some additional “dry powder” in the later stages of the expansion that could help cushion against future shocks to consumer spending. One potentially negative consequence for consumers (over the longer term), however, is that the drop in energy prices has coincided with a noticeable run-up in the debt-to-income ratio, as measured by consumer credit outstanding to disposable income. To be fair, other widely followed measures of debt-to-income ratios have shown only a very modest uptick, but if sustained, this is perhaps an unforeseen consequence of the big drop in oil prices.
In many respects, aside from taking on more debt, consumers really did nothing different in the past 18–24 months than they did in the early stages of the recovery from the Great Recession, when they also both spent and saved more than they had during the Great Recession. Looking ahead, barring a return to near $100 per barrel oil prices, we continue to see consumer spending running at around two-thirds of its normal pace, supporting gross domestic product (GDP) growth between 2.5% and 3.0% for the remainder of 2016.*
John Canally is chief economic strategist for LPL Financial.