In their latest views on energy affordability, consumers gain a spring in their step

After starting 2017 on a low note in their views about the affordability of energy, U.S. consumers were feeling better about the situation by spring. The affordability indices for both gasoline and home energy increased from January to April. Derived from the University of Michigan’s quarterly Energy Survey, each affordability index is scaled so that a value of 100 reflects a consumer belief that energy costs would have to double (that is, go up by 100 percent) before really crimping their household lifestyle.

As of the latest data, taken during the month of April, the gasoline affordability index showed a slight increase to 105. The home energy affordability index rose significantly, reaching 148, its highest level since the U-M Energy Survey began in October 2013, as shown in the chart below. 

These gains occurred even though there was no significant change in the Index of Consumer Sentiment, which has remained quite stable since the beginning of the year. That measure of U.S. consumers’ general feelings about the state of the economy is reported monthly by the U-M Surveys of Consumers, to which the Energy Survey is a quarterly add-on.

As seen in the chart, the latest home energy affordability index surpasses all previous quarters by nearly 10 points. April 2017 also marks the first quarter for which the home energy index changed more than the gasoline index. Typically, the home energy index varies over a narrower range (38 points between its lowest and highest recorded values to date) than the gasoline index (which has seen a range of 101 points, due to the volatility of gasoline prices).

The following chart breaks down consumer views on home energy costs by income. As expected, the higher one’s income, the more affordable one finds energy to be (as we imagine is the case for just about anything). This spring’s increase in the perceived affordability of home energy occurred in all income classes. But the jump was highest for respondents in the top income tercile, whose average affordability index rose by 42 points from January to April this year and was 38 points higher than it was last April. 

As of this writing, Energy Information Administration (EIA) data on residential energy prices were only available through February, so we can’t tell whether price trends explain the rise in perceived affordability. However, national average electricity and natural gas prices were both up a bit as of February 2017 compared to a year earlier.

Our survey, however, found that consumers reported lower home energy bills than they did in the past. On average, respondents told us that they paid $147 per month for home energy as of our April survey, compared to $158 in January and $159 in the April 2016 survey.  Moreover, in response to our question about how high their monthly bill would have to become before consumers would find home energy costs unaffordable, the average answer rose to $342. That value is notably higher than its average of $321 per month in January and $326 in April a year ago. The jump in the home energy affordability index therefore results from the combination of lower self-reported energy bills and a greater expressed tolerance for higher home energy costs.

In previous years, the perceived affordability of gasoline tended to be high in the winter survey, taken each January, and then fell by spring. But compared to other recent quarters, gasoline affordability was uncharacteristically low this winter, when it dipped just below 100. So it is perhaps less of a surprise to see consumers’ attitudes improve by spring even though the national average gasoline price of $2.53 per gallon in April was a bit higher than its $2.46 per gallon average in January.

Thus, Americans’ somewhat more positive feelings about the affordability of motor fuel cannot be attributed to lower pump prices. What we did find is that the average price which survey respondents said they would find to be unaffordable rose to $5.18 per gallon. This uptick is shown in the next chart, which compares the price that consumers on average said would be unaffordable to national average pump prices each quarter. The April 2017 level is notably higher than the average January response of $4.76 per gallon, which was the lowest average response since we launched the Energy Survey in October 2013. Even though pump prices themselves fell substantially in late 2014, we see that the price considered unaffordable trended down more gradually. During the first year of the survey, when gasoline averaged $3.56 per gallon, consumers on average felt that $5.69 per gallon would be too much to pay. Over the most recent year-long period, the average response to that question fell to $4.94 per gallon. That’s $0.75 per gallon drop in consumers’ threshold of serious “pain at the pump” compared to the $1.17 per gallon drop in the national average gasoline price, which averaged $2.39 per gallon over the year-long period ending in April.

Although we don’t have an explanation for the recent uptick in the gasoline price that consumers say they would find unaffordable, our results suggest that Americans have gained some confidence in their fuel-related purchasing power, perhaps boding well for an active summer driving season.