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Will consumers spend cash saved on cheaper gas?

Gas prices at this Sunoco station hover at around $3 in New Jersey on November 13, 2013.
Patti Domm | CNBC
Gas prices at this Sunoco station hover at around $3 in New Jersey on November 13, 2013.

The cheapest gasoline prices during the holiday shopping season in four years have put billions back in the pockets of shoppers, but it's unclear how much of it will be funneled into their holiday spending plans as consumers continue to hunker down.

The national average for gasoline at the pump Friday was $3.19 per gallon, 25 cents less than this time last year. The price has been falling steadily from about $3.52 on Sept. 1, and is way off its February highs of $3.72.

Even so, recent surveys show consumer attitudes are still not upbeat, and a Gallup poll this week shows consumers pared back spending plans to less than they expected to spend even just last month. Slow jobs growth, budgetary chaos in Washington, and the administrative problems with the Affordable Care Act were all mentioned by Gallup as possible factors souring consumer attitudes.

"I think the consumers will benefit from relief at the pump. I think that gas prices are only factor affecting their spending right now," said Jack Kleinhenz, chief economist at the National Retail Federation. "There's certainly some uncertainty that's been persistent because of slower job growth and wrangling on federal finances in Washington."

Gas prices' influence on economic attitudes

The National Retail Federation expects holiday sales to increase 3.9 percent this year, compared with last year's 3.5 percent gain, said Kleinhenz. NRF's forecast is at the higher end of the range, in part because it sees lower inflation, a by-product of lower fuel costs.

Gasoline hit a low this week of $3.18 per gallon, with many parts of the country below $3, but experts say it's unlikely gas will get much lower and there could even be a slight uptick. Still, these are the lowest prices for holiday shoppers since 2010, when gasoline prices between Thanksgiving and Christmas averaged $2.96 per gallon, according to GasBuddy.com.

"It's a two-fer from the retailers' standpoint. Their cost of goods will decline because of transportation costs. That could be very attractive in terms of providing product for the consumer. From the consumer's standpoint, it frees up income for spending," Kleinhenz said.

There clearly is split between the lower end of the market and higher end—a trend that's been apparent since the financial crisis began. Wal-Mart Stores, which caters to lower income consumers and suffers a competitive pricing environment, forecast disappointing, flat sales for the holiday quarter. Macy's, on the other hand, sees a more positive holiday period for its Macy's and Bloomingdale's stores.

In the Gallup survey, the more than 1,000 consumers surveyed reduced their forecasts for spending on Christmas gifts to an average $704, well below their October prediction of an average $786 and well below the $770 they forecast at this time last year. The current forecast is the lowest in four years.

It's difficult to ascertain just how much of the gasoline savings will translate to holiday sales, but Deutsche Bank economists say there is a direct impact on cash available to consumers. "One penny at the pump is worth one billion in household energy consumption," said Deutsche Bank chief U.S. economist Joseph LaVorgna.

"We might be surprised based on home prices, equities prices and the fact that gasoline is not a headwind, it might mean the consumer goes into the holiday season in better shape," he said.

Certainly, traffic at all types of stores picks up when gasoline prices fall. ShopperTrak has electronic sensors monitoring 70,000 retail locations.

"We know for a fact that there is a direct correlation in the movement in gas prices and consumer behavior and the willingness to spend," said ShopperTrak founder Bill Martin. "One of things that happens as gas prices go up, consumers make fewer trips to the mall."

"That translates into the sales figures as well. As we roll into the holiday season, and we see the gas prices soften that that literally is putting more cash in consumers pockets and we see that translating into holiday gift giving," Martin said.

Retail sales and gasoline prices

Martin sees an important trend that is actually helping consumers preserve fuel. They are doing more online research and he expects a 1.4 percent decline in store visits this year as a result.

But he still expects a 2.4 percent gain in sales at general merchandise, apparel and other stores, from the $259 billion sales in November and December last year. "The statistic is 70 percent of all sales involve some level of online research, but greater than 90 percent of all commerce is still taking place in the brick and mortar stores," he said.

The National Retail Federation includes online sales in its forecast, and Kleinhenz sees sales increasing by 13 to 15 percent during the holiday season, over last year.

Even with gasoline savings, consumer surveys are not showing shoppers to be full of holiday cheer.

The National Association of Convenience Stores' surveys gasoline consumers on their attitudes about the economy. The NACS did find that when gasoline prices were dropping in November, consumers became slightly more optimistic, and their pessimism declined along with gasoline prices. The monthly survey of some 800 drivers found that 33 percent were somewhat optimistic, compared to 27 percent last month, and 39 percent were somewhat pessimistic, down from 42 percent in October.

"An analysis of the 2013 to date has shown that price fluctuations (increases or decreases) have had a greater impact than overall prices when it comes to consumer sentiment. Consumer sentiment has regularly followed price movement this year, and in November a nearly 10-cent drop in gas prices contributed to a 5-point drop in consumer pessimism," the NACS said.

As for the Gallup poll, one in four of the consumers surveyed said they will spend $1000 or more on Christmas gifts, down from 30 percent last November. The number planning to spend less than $250 rose to 31 percent from 27 percent.

Sales at stores and gasoline prices

Gallup said a contrarian indicator in its poll that could be a postive was the narrowing of the number of Americans who said they would spend less - 26 percent, lower than last year's 28 percent, and the number that will spend more, a percent higher at 15 percent.

That 11 percent spread is one of the narrowest in recent years and Gallup says it suggests a five percent spending gain. Gallup also said consumer spending forecasts do improve between November and December. If that happens, spending forecasts could return to reflect the four percent gain expected in the survey last month.

One of the first places consumers spend their freed up gas money when prices go down is not far from the pump.

"When gas prices go down...the convenience stores get busier and the repair shops get busier," said Sal Risalvato, executive director of the New Jersey Gasoline, Convenience, Automotive Association. It also increases the amount of driving, which increases gasoline demand and ultimately sends prices back up.

"When people see prices dropping and it happens precipitously like we're seeing now, it gives them a sense that 'I can drive and know that my pocketbook isn't going to be hurt as bad,' and it tends to increase demand, maybe not initially," he said. "My fear whenever that happens is there's a perception that gasoline is on sale. If that happens at the wrong time, it will increase demand exponentially."

The gas holiday won't last indefinitely, even with oil trading well below $100 a barrel. John Kilduff, energy analyst at Again Capital, said gas is typically lower priced at this time of year and then picks up into the Thanksgiving holiday season, before falling again as January approaches.

"These weeks during the holiday season are very strong demand weeks. Between now and the end of the year, we get some weeks as big as the fourth of July week," said Kilduff. "It runs about 9 million barrels per day and then it falls off precipitously after the New Year.You expect a rally in prices and an uptick at the pump during that Thanksgiving time period, but I would not expect a lot though and you could see it falling off at the end up of the year, increasing more towards March."

He notes that forward futures contracts for the spring months are priced higher than front month gasoline futures. December gasoline futures were trading on Nymex at 2.68, while June futures were trading at 2.81 Thursday.

—By CNBC's Patti Domm. Follow her on Twitter @pattidomm.

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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