Wednesday, May 18, 2011

The Economic Slowdown, Part III; Gasoline, Food, and Consumer Spending

The US consumer is facing several headwinds: a weak employment market and high gas and food prices.

Let's start with a chart of gas prices:

Notice that gas prices have sharply increased over the last 2-3 months. As a result, we've seen a decrease in consumer gas demand:

The chart above indicates that consumer demand for gas is dropping at fairly strong rates, especially considering the importance of gas to the economy.

While gas prices get all the headlines, higher food prices also hit consumers. As I've noted before, high year over year increases in food prices are -- like energy prices -- precursers to recessions, as demonstrated by this chart:

However, I also want to stress that we are not seeing YOY food price increases that indicate recession. They are, however, starting to move higher at a noticeable rate. As a result, consumers are cutting spending on non-food and energy items. Consider this chart from the latest retail sales report:

Food and beverage purchases increased 1.2% and gas purchases increased 2.7%. Remember these figures are not inflation adjusted, so the increase also reflects higher prices. But also note the decreases in other, non-essential categories: furniture is down 1.1%, electronics are down 2.2%, sporting goods are down 1.9% and clothing is only up .3%.

Also note that the percent gains for the same non-food and gas categories in the preceding month are strong, indicating that gas prices are just now starting to bite consumer spending.

With gas prices still high and food prices also increasing, the consumer will continue to feel the pinch and adjust his behavior accordingly. This is in addition to a very weak employment market, which, according to the weekly initial claims, is getting worse, not better.