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Five Things You Need to Know: Topping Off, Tapped Out, Over-Leveraged, Plus, the Daily Deflation Datapoint and Bad Mood Rising


What you need to know (and what it means)!


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

. Topping Off

The Wall Street Journal this morning takes a look at the "relief" in store for consumers thanks to falling oil prices.

  • "The recent drop in oil prices could provide a welcome and surprising boost to consumer pocketbooks this fall, cushioning the economy from a falloff in home prices and construction while venting an important source of inflation pressure," the article says.
  • "Some 99% of the questions I get these days are about the size of the drag from housing, and I think that far too few people are thinking seriously about the boost from lower oil," Robert Mellman, senior economist at J.P. Morgan Chase told the Journal.
  • "Mellman said lower gasoline prices should boost the annual growth rate of consumer spending a full percentage point and could lift fourth-quarter economic growth from a forecast 3%, at an annual rate, to as high as 3.7%."
  • The negative personal savings rate suggests consumers have absorbed higher energy costs by saving less.
  • Slowing sales at retailers from Wal-Mart to Home Depot, Costco and Williams-Sonoma have also been attributed to higher gasoline prices by analysts and economists .
  • So, will consumers now be topping off.... or... are they...

2. Tapped Out

As the WSJ "Relief" article suggests, most Americans think they pay quite a bit for gasoline. So do most retailers. Retailers blame every uptick in the price of gasoline for extracting a significant slice of consumer spending. But is that really the case? How significant is the price of gas to consumer spending? Is it measurable? What if it is all about sentiment?

  • No question, we Americans take gas prices quite personally. But what are we really paying for gas? Is Mellman correct in the Journal article that lower gasoline prices could boost consumer spending by as much as a full percentage point?
  • Why a full percentage point?
  • Michael Englund, principal director of Action Economics, told the Journal in the same article that, "Price swings have a much bigger impact on consumer-confidence survey readings and business sentiment than they do on actual consumer behavior."
  • I'm afraid Englund is quite right. The data does not support a large contribution to consumption from lower gas prices other than as a sentiment boost.
  • The average price of gas is still up 42% from the average level of $1.85 in 2004 - and recent IEA data showed gasoline consumption was cut by 100,000 barrels per day.
  • Adjusted for inflation, the average price of gasoline - $2.62 a gallon for the week ending Sep. 11 - is well below the inflation-adjusted high in 1980 of $3.15, according to CNN.
  • Also, according to David Wyss, chief economist at Standard & Poor's, the average American must work 52 minutes to buy enough gas to drive a car 100 miles, compared to 105 minutes in 1980.
  • Wyss attributes the gain to better fuel efficiency and higher wages.
  • By these measures, gasoline prices should have less of an effect on consumption than most believe. Yet consumers do something few believed they would - they cut back on gas and consumption.
  • Here is where consumer spending bulls want it both ways:
    - If higher gas prices do hurt consumption so much, then the data suggests that must be because consumers are so over-leveraged that any uptick in expenditures causes sharp pains and forces cutbacks in consumption.
    - If higher gas prices do not hurt consumers so much, then the recent slowdowns in consumption must be for other reasons.

3. Over-Leveraged

What could these "other reasons" for a slowdown in consumption be? How about continually dipping into savings even while taking down cash-out refinancing packages on the home and running up still more debt?

  • Average monthly credit-card payments stayed at about $175 in the four months through July, according to Bloomberg.
  • However, balances surged by a third to $1,600, the most in at least seven years, according to America's Research Group, which conducts consumer research.
  • The consumer research group said people believed they were paying more for gasoline and groceries.
  • And sure enough, a July survey from the same firm found that 205 of parents cited rising gasoline prices as the primary reason for planning to spend less on back-to-school shopping.
  • Moreover, they found that the percentage of shoppers who said they feel pressure from credit card bills doubled to 43% in July, from March.
  • The key question here is how long any sentiment boost from lower gasoline prices will last.
  • If 20% of consumers themselves are unaware of the real cost and percentage of income drain created by higher gasoline prices, they will soon find that lower gas prices don't help as much as they might believe. Then the real fun will begin.

4. Daily Deflation Datapoint

Wait, you didn't think we'd skip the daily deflation datapoint, did you? It's gonna take way more than shouts of "stupid!" and "rubbish!" to get us to gloss over the deflation datapoints as they continue to pile up. Stocks and stones, pal. I mean, sticks! Sticks and stones!

  • What do you do when you flood the market with four or five different versions of the same product, turning it into a symbol of ubiquity?
  • What do you do when you start worrying about market saturation, supply outpacing demand?
  • You lower prices, which is precisely what Apple did yesterday with the full-size iPod.
  • You lower prices.
  • Rubbish! That's just a consumer product, something you want, not something you need, they say.
  • Rubbish indeed. Perhaps that's why we found it so interesting that Kroger, the supermarket chain that sells food (which we believe still falls into the "something we need" category) was able to show a second quarter earnings increase of 6.4% thanks in large part to fewer meals eaten out in restaurants owing to "higher gas prices" (oh, that again) and price cuts. Yes, lower prices.
  • Kroger lowered prices in some regions because the company wanted to increase its market share against higher-priced or vulnerable foes, the Cincinnati Enquirer reported.

5. Bad Mood Rising

The nation's normally upbeat entrepreneurs turned decidedly downbeat in August, according to the National Federation of Independent Business Small-Business Optimism Index.

  • The NFIB Small-Business Optimism Index (pdf file download) fell more than two points to 95.9 (1986 = 100), the lowest reading recorded since March, 2003.
  • (March, 2003. Admittedly, that's an interesting date. Hmmm.) Before March 2003 the lowest index reading was in 1993.
  • All index components were lower except for two:
    - The percent of firms with unfilled job openings
    - The percent of owners planning to create new jobs.
  • Three other interesting takeaways:
    1) Owner reports of increased difficulty in arranging needed financing edged up one point to a net 8 percent, the highest point since 2000, a sign of tightening credit.
    2) The net percent reporting higher rates on short-term loans rose four points to 34 percent, seasonally adjusted, the highest level since 1995.
    3) The percent of firms raising average selling prices fell to 22, versus 23 in June and July, 24 in May and 26 in April while the percent saying they plan to raise prices fell to 29 from 30.
No positions in stocks mentioned.

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