As we noted previously (here [4] and here [5]), the exuberance over 'lower' gas prices is a little overdone. Perhaps more worrying though, as Bloomberg's Jo Brusuelas notes, wholesale gasoline futures are pointing to about a 5% rise in gasoline prices during the next few weeks. This would essentially erase the entire decline in gas prices seen since Sept. 1. As Brusuelas warns, because recent gains in inflation-adjusted personal disposable income on a per capita basis can be directly tied to falling gasoline prices, rising prices may come at an inopportune time for many larger retailers.
[6]
Via Bloomberg's Joseph Brusuelas,
Real per capita disposable income is up 0.9 percent on a year ago basis – weak under any conditions. The reversal of those modest gains due to rising gas prices would not bode well for what is shaping up to be the most challenging holiday spending season since 2009.
Consumer spending and sentiment are notoriously sensitive to price increases at the pump. If gasoline futures are correct, the 5 percent increase in prices may result in as much as a $40 billion hit to consumer wallets just as the traditional holiday spending season hits its stride during the next few weeks.
[7]
While gasoline prices are down 16 percent since the February peak, the combined effects of the $148 billion increase in tax rates on upper income households and the resetting of the payroll tax effectively offset potential early-year gains in personal disposable income.
For middle income consumers and those further down the income ladder, small changes in disposable income can have a significant effect on discretionary spending. Among this group, 48 million individuals receive food stamps and will already see a net loss of about $16 billion in transfer payments due to cuts in the Supplemental Nutrition Assistance Program.
Under conditions of weak income growth and modest employment gains, aggressive discounting by retailers has not translated into a sustained acceleration in overall spending.
Demand for services has averaged 1.8 percent during the expansion, well below the 3 percent level seen during the previous two business cycles. On a year-ago basis, overall retail spending peaked in 2010 and has continued to decelerate since.
Meanwhile, November gains in retail outlays were directly tied to transitory events rather than a broader shift in the overall behavior of consumers. Auto purchases in October were pushed forward into November due to the government shutdown. The spillover of the “iPhone effect” into November also temporarily boosted the overall level of spending and probably helped mask underlying weakness in the retail sector.
[8]
Since the end of the Great Recession, the upper two quintiles of income groups have emerged relatively unscathed while the lower three quintiles continue to bear the disproportionate burden of the adjustment underway in the domestic labor market and broader economy. This suggests the status quo in the economy and overall spending will probably continue to hold; upper-income consumers benefiting from historically low interest rates, home price increases and appreciation in equity markets will contribute the lion’s share of gains in holiday spending this year.