STAUNTON, Va. — Mark and Patricia Loyd are reaping a windfall amid a recession. Their annual spending power has risen by more than $4,200, thanks to cheaper gasoline prices, lower home heating costs and reduced mortgage rates.
The Loyds — he's a warehouse manager and she's a keypunch operator — have used the money to reduce their debt burden, and Patricia Loyd has cut her work hours at a second job to spend more time with the couple's two daughters. They've avoided a spending spree.
"This gives us something of a breather, but if we were to start spending again, I'm sure it would snowball," Patricia Loyd said.
Together, falling energy and mortgage costs are giving U.S. consumers more than $159 billion in added spending power, according to estimates from industry groups. While the benefit — equal to about 2 percent of consumers' disposable income — hasn't been enough to spur a recovery, it has helped prevent a spending collapse, economists say.
"It's a sizable amount of money, but it's been overwhelmed because of the Sept. 11th terrorist attacks and because consumers have been paying off their debts," said David Wyss, economist at Standard & Poor's, the New York-based credit rating firm.
Boosting consumer spending can contribute to a recovery because rising demand helps businesses work off inventories and prompts companies to step up production, creating jobs. Consumer spending accounts for about two-thirds of all economic activity in the U.S.
President Bush and Congress sought to spur spending by passing a $600-a-couple tax rebate last June that has pumped some $38 billion into the economy. Congress last week failed to pass legislation aimed at further stimulating the economy after Democrats and Republicans reached a stalemate over speeding previously enacted tax cuts and helping the unemployed pay for health insurance.
When the economy slowed this year, many economists predicted consumer spending would collapse. Instead, it rose at annual rates of 3 percent in the first quarter and 2.5 percent in the second quarter, then slowed to 1 percent growth after the shock of the terrorist attacks.
Some economists say they expect fourth-quarter spending to rise at an annual rate of more than 4 percent.
Consumers have also become more upbeat than expected. The University of Michigan's monthly index of consumer sentiment rose in December to 88.8, from a final reading of 83.9 in November, suggesting that Americans may boost spending early in 2002.
Savings from cheaper energy and lower home mortgage costs can amount to thousands of dollars per family.
Heating oil prices have dropped to an average $1.16 a gallon, from $1.56 a year ago. The Energy Department estimates the average household will spend $786 for heating oil this year, down from $996 in 2000. Natural gas users will spend $626, down from $923.
Average interest rates on 30-year fixed-rate mortgages in which the buyer puts down 20 percent fell to 6.45 percent in November, from 7.42 percent a year ago, according to Freddie Mac, a congressionally chartered company that's the No. 2 buyer of home mortgages.
Refinancing a $150,000 mortgage under such a rate cut would trim a homeowner's payments almost $1,170 a year, the agency said. Add that to savings from gasoline prices and heating costs and a family's disposable income would rise by almost $1,800.
The Loyds did even better. Refinancing their house, they consolidated debts and reduced payments $300 a month, $3,600 a year. They'll save $520 a year on gasoline and $120 on heating costs. Total saving: $4,240. They also received $600 in tax rebates.
"I feel better knowing that we can pay for everything with cash," Patricia said. "And I like being able to have more time to be with my husband and my children."
The $159 billion aggregate figure breaks down this way: Lower gasoline prices will save consumers $48 billion a year, the drop in home heating oil prices will save another $3 billion, and cheaper natural gas will save $15 billion.
Some 7.5 million homeowners have refinanced mortgages this year, either to get cash or reduce monthly payments, said Lyle Gramley, a former Federal Reserve governor who is now an economist at the Mortgage Bankers Association.
Those opting to take the cash probably will receive some $100 billion, said Frank Nothaft, chief economist for Freddie Mac. Traditionally, borrowers spend just over half the amount they get from refinancing and save or invest the rest. Nothaft also estimated that refinancers have reduced the interest payments on their mortgages by about $3 billion this year.
Economists say the impact of price cuts may have been blunted as some families started to pay debts rather than boost spending. U.S. household debt rose to $7.6 trillion in the third quarter, up from $6.9 trillion in the third quarter of 2000. Personal saving as a percentage of disposable income rose to 0.9 percent in November, compared with 0.2 percent in October, the Commerce Department reported.
Geoffrey and Sherri Fosdick, another Staunton couple — he's an attorney and she's a real-estate agent — refinanced their mortgage in November, opting to trade in their equity for cash. Although their mortgage payment rose $200 a month, they've paid off a $10,000 remodeling bill and are putting $20,000 in savings.
The household debt burdens suggest it will take several months for Americans to clean up their balance sheets enough to increase spending, said Joshua Shapiro, chief U.S. economist for Maria Fiorini Ramirez Inc., a Wall Street economic consulting firm. That means "a weak profile for consumer spending in 2002," he wrote.
The price cuts haven't packed the wallop that a tax reduction might have, said Wyss of Standard & Poor's. They don't reach as many families because not everyone drives very far, lives in an area that requires cold weather heating or has a mortgage to refinance.
The benefits accumulate over time instead of arriving in a two- or three-month period, as a tax rebate typically would, and they could be reversed if energy prices and interest rates rise.
Nevertheless, at some point, the extra stimulus, including the tax rebate and the Federal Reserve's 11 reductions in its overnight lending rate this year, should help spur more spending, said Joel L. Naroff, president of Naroff Economic Advisors Inc. of Holland, Pennsylvania.
"The magnitude of the factors that are in place already," he said, "is enormous."