Do Gasoline Prices Still Threaten Retail Sales?

Two months ago, I wondered if rising gasoline prices threatened retail sales. At the time, energy costs were rising, taking an increasing bite out of consumer purchases. It looked like a train wreck. Consumer purchases, after all, represent roughly 70% of GDP. But gasoline prices hit a ceiling in early May and have been flat to moderately lower ever since. There’s no assurance that prices won’t resume taking flight, but for the moment there’s been a slight reprieve on the energy-based assault on retail sales.

Gasoline sales as a percentage of total retail sales fell in June to 11.5% from the previous month’s 11.7%, as the chart below shows. That’s the first reduction on a monthly basis in a year. It’s unclear if the decline will roll on, but in the interest of giving the economy a boost it’s a no-brainer to hope that lesser percentages are in the cards.

As economist R. Mark Rogers advises:

The price of gasoline affects dollar volume sales at service station stores. Oddly, higher gasoline prices can make overall retail sales look good, even though consumers have less money to spend on other things after filling the gas tank. Eventually, high gasoline prices hurt retail sales outside of gasoline. Lower gasoline prices boost the real spending power of consumers; this ends up boosting retail sales outside of the service station component.

The U.S. Energy Information Administration (EIA) isn’t expecting much of a decline in gasoline prices, although the agency doesn’t see a dramatic increase either. “EIA expects regular-grade gasoline prices will average $3.62 per gallon and $3.51 per gallon over the third and fourth quarters of 2011, respectively,” according to the Short Term Energy Outlook published on July 12. That price prediction is down modestly from the heights reached earlier this year, although retail gasoline in the $3.50 range is still near the all-time highs reached in the summer of 2008. The threat to retail sales may have faded a bit, but it remains potent.

Even the EIA’s moderate optimism may be hoping for too much. It’s too soon to make bold predictions that the retreat in gas prices has run its course, but there are hints that the decline may be be over. As Consumer Reports notes, gasoline prices have started inching higher once more.
What catalysts might unleash a sustained rise in gasoline prices? The International Business Times ponders three possible scenarios:

a) a U.S. Government default that causes institutional investors to dump U.S. Government bonds, triggering a plunge in the dollar, pushing up oil’s price

b) any sustained unrest in another oil producing nation in the Middle East; or

c) stronger growth in Asia/Latin America emerging market economies, most of which are registering large annual percentage increases in oil consumption.

Any one of these factors might be enough to push energy costs higher for months (years?) to come. The really bad news is that it’s not beyond the pale to anticipate all three of these trends unfolding in the near term.