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Consumer expectations have gone up in Virginia as gasoline prices have come down, according to a new quarterly poll measuring how people feel about the economy.
The Virginia Consumer Sentiment Report, issued by Roanoke College on Tuesday, shows the largest quarterly boost in public expectations in more than four years, rising more than 15 percentage points after dropping by 30 points since the beginning of the COVID-19 pandemic.
The biggest reason is the drop in gasoline prices from a record high on June 14, when the average price at the pump was $4.86 a gallon, to an average of $3.68 a gallon on Tuesday, reflecting lower crude oil costs and lower expectations for demand in the future.
“As gas prices fall, not only will this make filling your tank cheaper, but the indirect effect of higher fuel prices on food and other shipped items also will lessen, allowing each hard-earned dollar to go farther and lessen the financial pinch we are all feeling,” said Alice Louise Kassens, a professor of economics at Roanoke College and senior analyst of the Roanoke College Institute for Policy and Opinion Research.
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Consumer confidence and expectations matter, Kassens said. “If people are worried about the economy’s future, it can become a self-fulfilling prophecy, and we can push ourselves into a recession.”
“The labor market remains strong,” she said. “The pullback in quarantine recommendations for school-age children will give parents more freedom to pursue job openings, further strengthening the labor market and bolstering the economy. The largest drag on sentiment is inflation.”
One Richmond economist cautioned that while inflation is hurting less now than it did in June — when the Consumer Price Index rose more than 9% from the same month a year earlier — falling gasoline prices don’t eliminate other sources of inflation, such as housing costs and wages that still don’t stay ahead of prices. The inflation rate was flat from June to July but still 8.5% higher than the same month a year earlier.
“I think it’s great that your inflation expectations have moderated nominally,” said Kent Engelke, chief economic strategist and managing director at Capitol Securities Management, Inc.
But Engelke said that hasn’t stopped the Federal Reserve Board from continuing what he called its “relentless messaging” that it is raising interest rates to blunt the rise of inflation, after incorrectly assuming a year ago that rising prices were “transitory” because of the pandemic.
“They’re relentless in this because they’re trying to get their credibility back,” he said.
Consumer sentiment has two components in the Roanoke College poll: confidence in the current economy and expectations for the future.
The Virginia Index of Current Conditions isn’t as buoyant as the measure of future expectations. The index is up by almost 10 percentage points from the previous quarter, but the institute said it’s still down by 14 points from a year ago.
Only one-fourth of the people who responded to the poll say their finances have improved from a year ago despite rising home values. Wages buy less, and less than one-third say it’s a good time to make a big purchase, such as a refrigerator.
But consumer confidence still rose to 59.3 on the index, compared with a national score of 55. “They are slightly more optimistic than the nation as a whole,” the institute noted in its announcement.
The outlook is brighter in the Virginia Index of Consumer Expectations, which reached 70.8, almost 16 points higher than the national index. The percentage of people who expect the economy to improve rose 7 points, to 38%, since the last quarter.
One of the biggest determinants of those expectations is future gas prices, the institute said. The survey, based on 664 interviews conducted Aug. 7-16, found that 42% expect gas prices to rise in the next year, compared with about 25% who expect them to fall. Most expect prices to increase by less than $1 a gallon.
“Virginians anticipate rising overall prices in the near term, although the short- and long-term price expectations are close to their historical averages,” the institute said.
Future expectations also have helped to reduce the cost of crude oil, which “continues to be the driver for [gasoline] prices to drop,” AAA Mid-Atlantic spokesman Morgan Dean said Tuesday.
The summer driving season is coming to an end, although the hurricane season is peaking, which always poses a potential threat to gasoline production and supply.
Consumers also changed their behavior when gasoline prices spiked in mid-June, driving less and combining errands.
Revenues from Virginia’s taxes on motor fuels rose by 25% in the fiscal year that ended June 30, compared with the previous year. But the increase was 5.2% lower than forecast in the Commonwealth Transportation Fund — a difference of about $67 million for taxes that generated more than $1.2 billion. Total revenues for the fund rose about $460 million last year, about $32 million fewer than forecast.
“I think people backed off of driving,” said House Appropriations Chairman Barry Knight, R-Virginia Beach.
