Falling Gas Prices Help Low End Consumer

We mentioned last week that decreasing Oil prices would bode well for the consumer — especially for the lower end consumer.

Not enough to start an entire new cycle, but a little relief that puts some jingle into their pocket.

Yesterday evening, Target tightened their September same store sales forecasts, previously a range of 3-5%; Now, the firm sees 5% same store sales gains:

"Target Corp. (TGT) said late Monday it now expects sales at stores open at least a year to rise around 5% in September, up from a previous forecast for a 3% to 5% rise.

The Minneapolis-based discount retailer’s same-store sales rose 5.6% in September 2005. Target’s same-store sales were up 2.8% in August; they’d risen 6.3% in the same month a year before."

Note, however, that the drop in Oil to the lows $60s translates as $10 or so a week to most familes.  It is a welcome respite — as will be lowered natural gas prices this winter– but its not the beginning of the 1990s all over again . . .

UPDATE September 19, 2006 10:05am

This was a surprise, in light of the recent activity in fuel / energy prices:

Retailers Draw a Weak Forecast for Holidays

Retailers’ sales gains during the holiday season will likely be weaker this year as consumers grapple with a stumbling housing market, according to a Washington-based trade group.

The National Retail Federation plans to announce today that it expects retail sales for November and December to increase 5% to $457.4 billion from the 2005 period. Last year, holiday sales increased 6.1%, according to the trade group, in line with its prediction for a 6% gain. Over the past decade, the industry has seen an average annual increase of 4.6%, the group said.

The forecast comes on the heels of weak back-to-school sales for many chains, which have stoked fears that a slowing housing market has begun to take its toll on middle- and upper-income U.S. consumers, who had kept spending despite soaring energy prices over the past year.


Target Lifts Same-Store-Sales Forecast For Sept
DOW JONES NEWSWIRES, September 18, 2006 6:32 p.m.
Carolyn Pritchard

Retailers Draw a Weak Forecast for Holidays
WSJ, September 19, 2006; Page A19

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What's been said:

Discussions found on the web:
  1. S commented on Sep 19

    Did you read the Goldman economic analysis of 9/15/06?

    They claim the housing bust will result in between 1.5 million and 2 million jobs lost over the next “several” years. They also lowered 3Q GDP from 3% to 2% based in part on the poor retail environment. Finally, they estimate the drop in gasoline prices increase real income by $60 billion, and will result in a 4Q GDP bump to 2.5%.

  2. barry h commented on Sep 19

    No its not the start of the 1990’s all over again, however, the economy has been stronger than many have imagined for some time. As evidence, see below:

    Total tax receipts were $85.8 billion on Friday, compared with the previous one-day record of $71 billion on Sept. 15 of last year, the Treasury said.
    Within the overall figure, corporate tax receipts Friday were $71.8 billion, up from $63 billion in September of last year. Treasury Undersecretary for Domestic Finance Randal Quarles said Friday’s numbers provided a “continuing demonstration of the strength of the U.S. economy.”

    “In fact, Friday’s gross receipts were the largest in a single day in the nation’s history – 20% higher than receipts on the same quarterly tax payment date last year,”

    barry h

  3. fred hooper commented on Sep 19

    Whoopee! $10 a week = a couple of happy meals. Who are the lower end consumers? The 30% of households that don’t own a home? The real lower end is anyone that bought a house in the last 3 years, especially those with an upcoming option ARM reset. From Marketwatch:

    Misery quotient
    Just how much are borrowers with option ARMs going to suffer?


    Now we’re talkin’ bout some real pocket cash.

  4. ac commented on Sep 19

    I think people are significantly over-estimating the positive effects of lower gas prices.

    Yes, lower energy costs are beneficial. But keep in mind, though lower, they’re not really low. Was the economy roaring along in 2002 with oil at $25/bbl?

    Why should $64/bbl oil suddenly mean consumer nirvana?

    Oil prices are still very high. Meanwhile the real driver of US consumer spending and the economy – housing – is in all out collapse.

    Does a decrease in oil prices from really really high to really high change all that much in light of everything else that’s going on right now?

  5. dryfly commented on Sep 19

    I think people are significantly over-estimating the positive effects of lower gas prices.

    I agree. But I’ve also believed that biz analysts over-estimated the NEGATIVE effect of increasing prices.

    I’ve felt all along that this whole boom – housing included – has been driven by the yuan-dollar cycle. If Asia stops lending us money, we stop buying… the rest (oil prices, housing market, etc.) are EFFECTS not causes.

    Until that happens these reports are just waves on top of the flow.

  6. calmo commented on Sep 19

    fred has my sentiments exactly. And if Oil drops further to say $50/bl we could be eatin at the Golden Arches full time. [Just think of it people: no more washin the dishes!] Or Oil could bounce back up to $70/bl and we’ll be forced to watch all those CEOs get their happy meals.
    I dunno barry h. I just don’t know that the largest corp tax receipts is an indication of the strength of anything but the corporations.
    I dunno whether those quotations were double duty quotes –was there an element of sneer quotation in your post? Were you poking fun at Randall’s exclusion of personal income tax receipts? Do you expect the falling housing market to impact the latter or do you think the robust economy that Randall alluded to will contain similarly large wage gains that will reinforce those large corp tax receipts?
    I just dunno.

  7. Bob_in_ma commented on Sep 19

    “The real lower end is anyone that bought a house in the last 3 years, especially those with an upcoming option ARM reset. ”

    I agree. Anyone looking at the present situation and thinking the number to watch is the price of oil, the CPI or the realative bearishness/bullishness of the market is missing the forest for the trees.

    The housing market is just starting a long, hard fall. The builders haven’t even really started to cut back. The headline number today is housting starts are down 20% yoy. But homes completed is down just 2%. The builders are still building into a glut.

    The most important numbers to watch right are coming next week with the new and existing home sales figures. And within those, the focus will be on inventories.

    Housing starts are going to plummit over the next 9 months, and home prices have already started what is likely to be a multi-year descent, at a time when huge numbers of people have no, or negative, equity, and many LTV figures are suspect.

    And it’s a complete myth that only the bubble markets on the coasts are in danger, prices are falling fastest in areas of the mid-west, and there are increasing signs of speculative over-building in Texas.

    Robert Schiller is going to be 2 for 2, bubble-wise.

  8. Geoff commented on Sep 19

    Let’s put this in perspective – US gas consumption is about 120 mil barrels a year, so in the fourth quarter, even if you assume gas goes from $3 to 2.50, we are talking about $15 billion less spent on gas, and $15 billion spent on something else instead. The rest of the pyschological effect isnt that important. If you look at retail sales, gas sales will pull back, and the money will flow elsewhere. But this doesnt do anything to incomes, which make or break the change in retail sales growth and overall spending. So all this talk about gas prices is silly. It will help certain retailers that are viewed as discretionary, and that have seen a setback since gas price hikes diverted money from them – such as casual dining, etc, but in one quarter, this isnt that big of a deal. Consumer spending is $2 trillion dollars in the fourth quarter, remember, so $15 bil not spent on gas is nothing to cheer about.

  9. Fred commented on Sep 19

    Gotta start somewhere. As to psychological effects, declining prices lead to dishoarding as people work off supplies they expect to replace more cheaply later. That takes some pressure off supply. Don’t underestimate the amount of gas in storage in people’s cars and those gas cans in the garage.

  10. Mike N commented on Sep 19

    Barry –

    This gave me a chuckle- the NYT ran a story on the exact same holiday sales forecast, but their headline was

    “Retailers See Strong Sales for Holidays”

    Guess that should teach all of us a lesson about grains of salt etc.

    The Story:

  11. Cherry commented on Sep 19

    Housing starts have really come down. Construction employment is now well above starts. weeeeeeeeeeeeeee on the rolly coaster.

  12. S commented on Sep 19

    Thailand triggers the next down leg? Who woulda thunk it?

  13. sam commented on Sep 19

    After tomorrow’s FED, is it a good idea to buy QQQQ puts?

  14. Bob A commented on Sep 19

    Aren’t these the same shopper’s that are seeing rent increases we’ve talked about previously that easily offset any gas price savings?… if indeed lower gas prices last.

  15. Mark commented on Sep 19

    With the guns drawn around the Thai capital, they’ve apparently gone from the baht to the baht-a-bing.

  16. Craig H commented on Sep 19

    I think the stock market is realizing that bonds aren’t rallying hard just because the PPI came in weaker than expected, but because the risk of recession has risen due to the housing crash being much worse than the “soft landing” crowd had hoped.

  17. KirkH commented on Sep 19

    I read somewhere that everything was cheap during the ’30s, must have been a fun time…

    David Lereah, head NAR economist said today “The housing boom ended more than a year ago, but sellers are having a tough time accepting that fact, says David Lereah”

    He wrote a book last year.
    “Why the Real Estate Boom Will Not Bust”

  18. Josh commented on Sep 19

    So 5% yoy gains are weak, when the average for the last decade has been 4.6%? We’re all so short term oriented that the comparison to last year’s growth rate is all that matters?


  19. scorpio commented on Sep 19

    maybe the drop is Thai-related, more likely it was having to look at Bush’s face at the UN as he decided to celebrate Rosh Hashanah by declaring permanent war on the Muslim world.

  20. Brian commented on Sep 19

    Dang I shouldn’t have put it all in that Thai internet stock. It was going to be the next Google!

  21. S commented on Sep 19

    Didn’t LTCM blow up about the same time the Thai baht revaluation sparked the Asian currency crisis?

    Yesterday Amaranth blows up. Today a coup causes a Thai baht selloff.

    Strange coincidence.

  22. scorpio commented on Sep 19

    i’ll bet hedge fund investors were burning up the phone lines this morning, calling their managers to ask “just what are you doing in your fund that i dont know about? how far outside your parameters have u strayed? can u even raise cash without disrupting your market?” despite the lock-ups, probly put a little fear into the market

  23. NotAPro commented on Sep 19

    So why are gas prices lower? I’m sure it’s not because Bush ordered them lower for the election. :) Is it all due to decreased demand? An increase in supply? Something else?

  24. barry h commented on Sep 19

    Calmo, no sneer intended. Quote was copied from news article as is. And no, I was not poking fun at exclusion of personal income taxes. I do expect housing market slow down (long overdue…gains have been absolutely huge) will impact GDP..both at builders slower production and at individual spending when mortgage payments go up. However, recent wage gains have been increasing without the recent assistance of the housing market and will likely continue. Much of the housing boom was fueled by individual investors, of significant financial means, speculating on investment properties. These players can afford to take some losses….but you can bet they stand ready to reinvest as property values go down in areas they have wanted to buy in for some time. Charleston and Hilton Head SC come to mind.

  25. TRJ commented on Sep 19

    I’m curious how the National Retail Federation makes their forecast. Are sales flat and this increase is strictly inflation?

    The other day, in my daily paper, I received a JC Penny & Sears ad both touting big sales and I never get ads like that.

    And the Fed…what’s the fed going to say? I’m curious to see if there are any dissenters.

    -The Real Josh (someone hijacked my name so now I will be TRJ)

  26. angryinch commented on Sep 19

    Geoff wrote that “$15B less spent on gas means $15B more spent on something else.” Certainly true, as far as it goes.

    But with the latest income figures flat as a pancake and costs continuing to rise for the things folks need, $15B is a spit in the ocean compared the the trillions in consumer spending every year.

    Not only that, what is going to replace the $500B+ in cash-out refis or HELOCs that we’ve seen each of the past three years if/when the Housing ATM runs dry?

    Seems like a loss of $500B trumps a s/t gain of $15B.

  27. phil commented on Sep 19

    “maybe the drop is Thai-related, more likely it was having to look at Bush’s face at the UN as he decided to celebrate Rosh Hashanah by declaring permanent war on the Muslim world.”

    I’m not jewish and i’m celebrating the war on the “muslim world” as if theres such a thing. the drop can probably be attributed to the news reports showing the gangs of uneducated 8th century throwbacks that are still allowed to coexist with civilization-

  28. muckdog commented on Sep 19

    No McDonalds! Haven’t you folks seen Supe Size Me?

    Who knows about housing… Those fixed rates are really low.

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