Weekly Market Commentary 4-25-11

Higher Gas Prices-Who's the loser?

Tim Phillips – CEO, Phillips & Company

A few weeks ago we mentioned how we had already seen some GDP forecasts revised down to 2.97% from highs in February of 3.20%

Either all of these guys aren’t very good at accurately forecasting the size of the world’s largest economy 12 months in advance or there’s a fly in the 2011 economic ointment they were depending on. My guess is that we are all lousy at forecasting the outcomes of a $14.7 trillion economy 12 months in advance. However, to humor these professionals I wanted to see if one of the flies in the ointment is higher gas prices.

According the Energy Information Administration (EIA), US Regular Conventional Retail Gasoline Prices have risen by 33.90% in the last 12 months.

As seen with current data, politicians generally take a hit in their approval rating for rising gas prices. Even when the economy has been improving Obama’s approval ratings have dropped lately with the spike in gas prices.

Recent research has shown that marginally higher gas prices don't have a large impact on gas consumption, so the real questions are:

• Do rising gas prices have an impact on consumer spending?
• If so, how big is that impact?

To put it another way, how much does a rise in gas prices take from discretionary income? Experts have called this the “Discretionary Income Effect”.

Opinions vary, but according to the US Department of Energy, in 2007 the average percentage of household income spent on gasoline was 4.80%.

If the average income per household is $49,777 (as recorded in 2009) and gas prices are up 33.90% then the lost dollars to other consumables is $810 per year or $67.50 per month. That’s a fairly insignificant amount to those that drive most of the consumption (which are earners above the median income).

While there are other casual implications like:

• Does the uncertainty of rising gas prices drive consumers to save more vs. spend on other items?
• What’s the impact of consumption of durables and specifically items that consume energy?

The bottom line is fairly straightforward, the politicians have much more to lose than our consumption driven economy.

Please send me your thoughts, comments and feedback to tphillips@phillipsandco.com

Tim Phillips, CEO – Phillips & Company