Retail Spending’s Anemic Response to Long-Sought Gas Price Decline is Ominous Sign

At first glance, a 25% drop in gas prices should have spurred a bit more of a rebound in consumer spending.

And if that wasn’t enough to boost consumer spending and sentiment that leads to sustained spending — the question remains, what will?

For the retailers — especially the electronics firms and furniture firms — for the restaurants, the latest data from the U.S. government is a bit ominous. There are a finite number of levers to pull, and none of them exactly help margins.

Less spent at the pump means more in the proverbial pocket, which in turn means that there is more discretionary income to be spread around.

But that’s not what we saw, according to the data points in evidence on Wednesday (Aug. 17).

As reported, monthly sales in July, which aren’t adjusted for price changes, totaled $683 billion, according to the U.S. Census Bureau report. That’s a flat reading from July, but if you strip out auto and gas, spending rose by 0.7%. Growth is growth, yes, but we’re a long way away from the type of growth that boosts flows through to the bottom line.

Read also: Retail Sales Flat in July as Pump Prices Dip Further

As for the spending, there’s no one-to-one ratio to bank on, we note. There’s no multiplier that states that a dollar saved at the gas station (gas prices are down roughly by that amount per gallon in the last two months) translates into several dollars’ worth of spending that shows up in other verticals.

Anemic Spending Data

Indeed, the data from the government show that overall spending on retail was flat, grocery was up 0.2% basis points, electronics up 0.4% (all measured from June). Non-store purchases, typically used as shorthand for online spending, was $104.5 billion in July, a slight gain from the $101.5 billion seen in June.

So: Gains, yes, but not anything that may be regarded as commensurate with the precipitous drop in gas prices. In other data points, Target grappled with an inventory overhang, where moving goods on the shelf hit profits, and management noted that consumers have been dialing back on discretionary spending.

The fact that some of the aforementioned categories saw some growth speaks to the fact that consumers are picking and choosing where they spend money; and the slowing growth also hints that there’s some saturation in the mix. Consumers are eyeing inflation, but they are also finding that they may not need the additional furnishings or electronics. Spending at food and drinking establishments was up an anemic 0.1% basis points — and so, clearly, people do not need to go out … even amid the warm weather and outdoor dining and the great reopening.

In the meantime, the Fed is hawkish on inflation, and even with 75 basis point boosts to the Fed Funds rate — which sets the tone for interest rates on credit cards and other debt — there may be more rate hikes on the rise.

That means that digging into the wallet for the credit card may not be as automatic a choice as it once was. July’s data may have marked a peak, where not even a drop in gas prices was enough to keep the engine of the U.S. economy (that’s consumer spending) humming.

What’s Next?

The pressures on discretionary budgets, evident headed into Labor Day and into the all-important holiday season, does not augur well for retail. As we noted there are only a few ways to give a tailwind to spending. Lowering prices is one — but that crimps profits (we’ve seen that with Target). Rewards is another, but that can wind up being a cost center too. Slim pickings, but likely, if retail spending remains subdued, to be under consideration by many a merchant.