SENSITIVITY TRAINING

Joe Sixpack’s sensitive to fuel prices after all. Or so one could argue given the latest batch of gasoline data from the Energy Information Administration. The most-recent weekly average for demand, through September 9, fell to 8.636 million barrels of gasoline a day. That’s down more than 4% from 9.027 million b/d in the previous week. The drop’s even steeper from the 9.406 million b/d of two weeks ago. Is this a sign that higher prices have triggered a new era of conservation-minded Americans when it comes to fuel? Or is the recent data an anomaly and/or a cyclical glitch tied to the end of the traditional driving season?


The answer, as the New York Times today suggests, is less than definitive at the moment. Declining demand for gasoline “may also be explained by disruptions in the nation’s energy supply system, which is still recovering from Hurricane Katrina,” the Times notes. In addition, EIA numbers for gasoline demand generally are less than perfect in measuring exactly how much Joe buys when he drives into the local gas station. Again, from the Times: EIA estimates “do not measure every drop of fuel that drivers put in their tanks, because the agency can track gasoline only until it is delivered to large regional terminals, where it is then trucked to wholesalers and retailers, said Larry Alverson, an analyst at [EIA].”
John Kilduff, an oil analyst at Fimat USA in New York, weighs in with an observation in Reuters via USA Today: “Demand was down nationwide, partly because drivers were off the road in parts of Louisiana and Mississippi because of Katrina, and obviously because high prices are helping to discourage demand.”
Demand can be discouraged for a number of reasons, and when demand slips, all’s not necessarily well elsewhere. The driving public has, until recently, been more than willing to keep filling their SUV tanks in the face of rising gasoline prices. It’s a driving culture, in case you didn’t notice. But when prices spiked at the end of August and early September, courtesy of Katrina, even Joe and his buddies were chagrined and shocked at how much they were paying to fill up their four wheelers. Gasoline prices have since retreated, giving our hero a bit of a break, although prices have only fallen back to pre-Katrina levels, which is to say the remain historically high.
Katrina’s toll is now filtering through to more than just energy prices. Initial jobless claims soared to 398,000 for the week through September 10, up 25% from the week previous, the Labor Department reports. Virtually all of it is due to the hurricane. In fact, the jobless claims number was probably higher than reported given that many of the unemployed may be sitting in shelters or trying to solve more pressing concerns, such as finding a lost loved one, rather than filing for unemployment.
All of which surprises no one who reads the news. But how long will the bell toll for the economy as it relates to Katrina’s aftershocks?
Lower gasoline demand and higher jobless claims are but two shoes dropping in the aftermath of the Gulf region’s destruction. Other economic footwear is sure to descend. But all’s not lost, at least when looking at the stock market’s reaction, which is surprisingly upbeat so far. Since August 30, when the S&P 500 closed at its lowest since early July, the index has climbed 1.6% on a price basis through today’s close.
Donald Luskin, chief investment officer at TrendMacrolytics, writes in a note to clients today that the equity market is doing surprisingly well compared with other large-scale disasters in the past. One reason may be, as Luskin writes, that the “pro-growth policy [in the U.S.] is still on track.” He goes on to explain, “On the policy risk front, we are still betting that the $70 billion in tax cuts over five years built into Congress’s budget reconciliation process will be accomplished. This would include a two-year extension of the 2003 reductions in tax rates on dividends and capital gains (extending their sunset from 2008 to 2010), the extension of expensing provisions for small business, and the extension of the Alternative Minimum Tax ‘patch.’ ”
Perhaps the prospect of continued growth scares the bond market. Or is it the threat of higher inflation in the post-Katrina world? Or both? No matter, the fixed-income set is no mood these days to see the glass half full. The yield on the benchmark 10-year Treasury moved above 4.2% today for the first time since mid-August.
All of which leads back the tired old question of whether Joe Sixpack will stop spending. Apparently, he’s willing to cut back on gasoline. Is his new mindset temporary, or the just the first embrace of a new world order of fiscal caution? Joe’s not saying much, at least not yet, but everyone’s wondering. As Ed Yardeni, chief investment strategist at Oak Associates, writes today in his morning briefing to clients: the question about the consumer going forward has been front and center in his discussions. “Most money managers I talked with are nervous.” Still, Yardeni’s upbeat, predicting that Joe will keep going to the malls. The reason? It’s what all the optimists say these days: real (inflation adjusted) pay per worker is expected to grow.
Unfortunately, waiting for post-Katrina confirmation, either pro or con, will take time. August personal income and spending numbers don’t come out till the end of the month. But those numbers are still pre-hurricane. That puts the all-important September gauge on that front more than a month away. Meantime, hope, fear, and everything in between spring eternal.