A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

September 29, 2014

Pump it up: lower gas prices and retail spending
Growth rate of core retail sales and average gasoline prices

chart

Source: Bloomberg, as of 9/23/14. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • U.S. consumers are finding a little extra change in their pockets after filling up their gas tanks recently—thanks to the recent drop in the average price of regular gasoline from nearly $3.70 in late April to $3.34 at the beginning of autumn.
  • That leftover cash could help support spending in other parts of the economy; in fact this could already be happening: core retail sales, which exclude spending on gas, autos and building materials, have recently accelerated.
  • There could still be room for gas prices to decline further. Demand typically declines in the autumn after summer vacations end, and refiners switch from more expensive blends of gasoline mandated for summer use by the EPA to cheaper winter blends.
  • What's more the price of crude oil, which accounts for about two-thirds of the price of gas, has moved lower recently due to several factors: growing North American supply (especially from US shale oil production); softer than expected global demand; falling ethanol prices (an ingredient in gas blends) and a strengthening US$.
  • To be sure, oil and gas prices could reverse direction quickly—rising domestic production has not eliminated geopolitical risks in the oil market. But if moderation does continue over the next few months,  consumers could find added relief at the pump as the holiday spending season heats up.
  • Of course, for retail sales to sustain a level of growth associated with past expansions, the economy will need much more than a drop in gas prices—like stronger jobs growth and meaningful gains in wages and salaries.

The chart:

  • The chart shows the average price of unleaded gasoline in US and the 6-month average monthly percentage change in core retail sales on an annualized basis for the past two years.
  • Note that the average gas price is approaching their lowest levels seen in the past couple of years, but remains above $3 per gallon.
  • The pace of retail sales has accelerated from just under 3% in April to just over 6% in July and August, the fastest pace in three years.

Definitions:

Core retail sales exclude spending on gas, autos and building materials.


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Poll

Which Asian country will have the strongest growth in the coming year?








Poll

Which Asian country will have the strongest growth in the coming year?

Japan, as Shinzo Abe's policy initiatives take hold
(19%)
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(38%)
China, as Xi Jinping's reforms promote a stronger financial sector
(19%)
South Korea, as President Park Geun-hye's plan to boost growth bears fruit
(24%)



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Go for growth: Where will a global recovery be strongest this year?

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