Tuesday, August 26, 2014

Economy: Why The US Retail Sales Disappoint

(Drivebycuriosity) - The US economy is expanding. But the US retail sales have been disappointing recently. US consumers are reluctant to shop in spite of the healing job market and swiftly climbing stock & home prices. One explanation for the almost stagnating retail sales is the slow growth of salaries.

And there is another explanation: The high gas price. Today gas at US pumps costs around twice the average price in the 1990 (around $1,90 zfact). The rise works like a tax hike because consumers, especially commuters from the suburbs, have less money to spend for other goods.

The following table shows how average US gas prices at the pump developed since 2005 (each year mid August bespoke):

2005  $2.56
2006  $2.96
2007  $2.76
2008  $3.76
2009  $2,63
2010  $2,74
2011  $3,59
2012  $3,72
2013  $3,54
2014  $3,45

In 2008 the gas price jumped around one dollar (plus 30%), which turned then the economic slowdown into a severe recession, because many commuters couldn´t bear the dual burden of high gas prices and mortgages which let to a default of their mortgage payments (driveby).

After a short relief in the years 2009 and 2010 the high gas prices returned. Today US gas costs almost as much as at the peak in 2008 in spite of the rising US oil production (fracking). Pundits claim that the US refineries cannot use the American type of oil, called WTI (West Texas Intermediate, also known as Texas light sweet), therefore they depend on the International oil type, called Brent Crude. WTI costs today $94 and Brent $102.

Brent is more expensive than WTI because it is mainly produced in Middle East, Iran and Russia. The ongoing geopolitical issues (Iran conflict, Russia sanctions, wars in Iraq and more countries) are fueling speculation that the oil supply from these regions can be interrupted. Therefore the price for Brent has a speculative premium for risk which is keeping it expensive.

But there is hope. Recently the price for Brent dropped from around $115 to $102 because there is a flood of oil on the market and none of the alleged disruptions has happened so far. As a result the US gas price also went back ( minus 6.5% from this year's high) reports the financial service Bespoke Investment Group (bespoke). If there are no new severe conflicts the US gas price could fall further which should rekindle the US retail sales.

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