Wednesday, February 20, 2013

Will Surge in Gas Prices Crimp Consumer Spending?

It seems consumers are already feeling the pinch from the one-two punch of higher payroll taxes and delayed tax returns. Last week, Bloomberg obtained internal emails that showed Walmart had its worst sales start to a month in seven years in February:
"In case you haven’t seen a sales report these days, February MTD sales are a total disaster," Jerry Murray, Walmart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales. "The worst start to a month I have seen in my ~ 7 years with the company."
This followed disappointing results from January, according to Cameron Geiger, SVP of Walmart US Replenishment, based on a separate internal e-mail obtained by Bloomberg:
"Have you ever had one of those weeks where your best-prepared plans weren’t good enough to accomplish everything you set out to do?" Geiger asked in a Feb. 1 e-mail to executives. "Well, we just had one of those weeks here at Walmart U.S. Where are all the customers? And where’s their money?"
According to Walmart’s Global Customer Insights & Analytics report, as reported by Bloomberg News, about $19.7 billion less in federal tax refunds had been returned to its shoppers this year relative to the same time last year, and higher payroll taxes are paring about $8.5 billion of disposable income per month from consumer’s paychecks per month compared to last year.

If that's not bad enough, AAA reported yesterday that gas prices have risen for 33 consecutive days, having jumped 46 cents, or nearly 14% during this stretch.

According to the Energy Information Administration (EIA), the national average price at the pump hit $3.75 for the week ending Feb 18th, up 14 cents from the prior week and 49 cents higher than Christmas Eve.



While this is the third straight year the national average has approached $4/gallon and prices are just 4.3% higher than a year ago, the surge is much earlier and more rapid than in prior years. AAA said
"The 44-cent month-over-month increase is the most dramatic since June 2009," and "The national average in 2011 increased by just seven cents during the same 33 day period and in 2012 it increased by 18 cents."

The EIA estimates that gasoline expenditures for the average U.S. household reached $2,912 in 2012, up nearly 10% from 2011 and representing just under 4% of income before taxes:
"This was the highest estimated percentage of household income spent on gasoline in nearly three decades, with the exception of 2008, when the average household spent a similar amount. Although overall gasoline consumption has decreased in recent years, a rise in average gasoline prices has led to higher overall household gasoline expenditures."


The pain is particularly acute for low to middle income households, which make up the majority of Walmart's customers. While data from 2012 is not yet available, a summary of expenditures as a share of pre-tax income from the 2011 Consumer Expenditure Survey shows the lower down the income spectrum you go, the bigger the bite from higher food, health care and gas costs.


It's too early to tell how long the post-holiday hangover will last. American consumers have shown their resilience in the face of strong headwinds time and time again since the end of the recession. With a much-improved job market, rising house and stock prices, it's likely this will be a short-term issue and if anything should benefit retailers that cater to the bargain-hungry shopper.

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