Americans Feel Great About the Economy, Have Saudi Sheikh to Thank

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A flame from a Saudi Aramco oil installion known as "Pump 3" is seen in the desert near the oil-rich area of Khouris, 160 kms east of the Saudi capital Riyadh, on June 23, 2008.
The source of all our happiness.Photo: Marwan Naamani/AFP/Getty Images

American consumer confidence has soared to the highest level since the mid-2000s, one major index reported this week. And it makes sense! In the past few months, Americans have gotten a huge raise — and it has been especially big among hard-hit, lower-income families.

More consumers spontaneously cited increases in their household incomes in early January than any time in the past decade,” Richard Curtin, the chief economist for the Michigan Surveys of Consumers, said in a statement. Overall, consumer sentiment has climbed 21 percent year-over-year, with consumers especially excited about the direction of the economy, as opposed to its current state.

Granted, families have not gone on any huge spending sprees yet — aside from the notable exception of some splurges on cars, trucks, and SUVs. Consumers were cautious over the holidays, and are not suddenly rushing out for restaurant meals or new wardrobes or improved home goods. Nevertheless, the money is burning holes in their pockets and putting smiles on their faces.

When and if they do decide to lighten up and engage in a little more retail therapy, it should help fuel the virtuous cycle the economy has been in of late — more jobs means more spending means more jobs means more spending.

But wait! I lied. Consumers have not gotten anything like a fat raise of late (although there are some signs that might change soon). Wages have mostly been keeping pace with inflation, which has stayed low. In the Beige Book the Federal Reserve just put out, officials by and large said that wage increases were limited to just a few sectors.

The raise I’m talking about is a weird one: It’s entirely owed to the dramatic drop in gas prices. It’s not that consumers are earning more money. It’s that they have more money to spend, courtesy of tepid international growth and Saudi Arabia’s desire to crush the United States’ fracking boom. For American families, the glut of oil production and ensuing drop in prices has meant sharply less spending on gas — leaving more money left over for everything else.

Does it matter that households are feeling better about the economy owing to a drop in gas prices, rather than a boost in paychecks?

In some sense, no — a dollar is a dollar is a dollar for a family to spend. And Americans are not happy solely because of the drop in gas prices. The falling unemployment rate and strengthening of overall growth are having an effect too.

But wage increases tend to be sticky: If your boss gives you a $50 a week raise, she is vanishingly unlikely to take it away while you still have your job. And gas prices tend to be highly volatile. Maybe low prices will stick around for a few years, as some analysts think. Or maybe Saudi Arabia will change its mind, slash production, and bring back $4-a-gallon gasoline, draining American households of all that new pocket money at the same time.

The trick will be for earnings and wages to pick up before that has happened, not after. It will also be for the United States’ economy to keep growing despite the volatility in the markets, the strain in Europe, the pressures on the Federal Reserve to raise rates, and the generally crummy state of global growth.

Fingers crossed for that to happen. But in the meantime, we’re all feeling flush, and we have a Saudi sheikh to thank for it.