Gasoline Still Near $3.00 per Gallon. Longer Term, Less is Used

On average, retail gasoline prices last week held at the prior period's level of $3.00 per gallon, according to the US Department of Energy survey.That level is, however, down eleven cents from the peak one month ago.

The recent stability of gasoline prices owes to the decline in the price of crude oil. For spot WTI crude oil, prices at $90.00 per barrel are down almost 10% from the highs last month which nearly touched $100 per barrel.

That stability, however, is little comfort at the pump where prices have doubled versus the $1.56 averaged during 2003. To drive 10,000 miles in a vehicle which averages 20 miles per gallon, the annual cost has risen to $1,500 from $750.

At the margin, where spending decisions are made, persons earning $30,000 per year now will now spend 5% of yearly income on gasoline versus 2.5% in 2003. Since then the demand for gasoline indeed has fallen, but only modestly to 2.3% of real consumer expenditures from 2.5%. Bottom line: less will be available for spending on other goods & services.

Longer term trends paint a somewhat less gloomy picture for two reasons. 1) As a percentage of total consumer spending, that percentage spent on gasoline is down by nearly one half since before oil prices quadrupled in the mid 1970s, and 2) versus all other consumer prices gasoline has risen sharply, yet only to the level of the early 1980s.

Less demand for gasoline only is perhaps a saving grace for this picture. Had vehicle fuel efficiency not roughly doubled to that 20 miles per gallon, annual fuel costs would be $3,000. Ouch. That's still a doubling.

Relative to all other consumer prices, gasoline indeed has risen. Ouch. In fact, the rise rivals the gain of 25-30 years ago. A saving grace, perhaps; the level prices have risen to is still below the high seen in 1980. (That's only a positive if a person was born before 1963.)

Other factors also do mitigate the negative effects of the recent rise in gasoline prices. Disposable income growth is now accelerating versus decelerating in earlier periods of oil price shocks. And even though employment growth is recently down, the deceleration is nowhere near as dramatic as in earlier periods. And the unemployment rate is lower. Finally, interest rates are quite a bit lower.

That all, makes it quite uncertain how consumer will/is holding up. The data are inconclusive, so far. Anecdotal reports are mixed. Chain store sales are easing. Vehicle sales are flat to lower. (All of the data used in this analysis is available in Haver's USECON and USWEEKLY data bases.)

Oil Shocks and Price Stability from the Federal Reserve Bank of St. Louis is available here.

Today's announcement by the Fed of recent auction result can be found here.

It’s telling when an organization like the CBI says that the expected January reading of -5 still corresponds to an annual volume increase of 2.5%. But the result of December is the weakest in a bit over one year (since Nov 2006). The expected sales for January are the weakest since April of 2006. This is not Draconian weakness but then a look at the plots in this report and an application of the ever-reliable straight-edge forecast rule gives an idea of where we might yet be headed. Then again, straight edge forecasts are always wrong at some point, the only question is: when? Soon or later on? For the moment, momentum is gone and financial fragility – or even turmoil - is still with us. The BOE is worried enough to have cut rates even with a forecast that sees an inflation overshoot into 2008. In an era when the central banking mantra is "cement and anchor inflation expectations", this is indeed a bold step by the central bank. Of course the times are odd since there is even talk from the PM himself that doesn't rule out a nationalization of Northern Rock. The times they are a-changin’, aren’t they?

The level of the readings in the chart make a telling comparison with where they have been in the previous two years and THE LEVELS speak of current strength -- or better put -- current momentum. But the steadiness of the slippage is yet another signal and it forms a dark side of that momentum that sounds a warning for the times ahead. The expectations for sales and orders in January are off sharply from December and in truth it is hard to know what to pencil in for February and that is the number that policy must look to at the moment to sort out the mess. Is January a rogue and outsized drop? Will February reverse it? Will February worsen on trend? These are things we do not know, and as Inspector Clouseau of Pink Panther fame reminds us: ‘we do not know what we do not know’. So policy must have its hunch and make its deal with the devil. The question is, of course, which devil? The CBI report is decidedly mixed and the trend is a call to action. But it is not clear that the BOE has the wherewithal to answer it, despite having cut rates once already. It is also far from clear what action is called for.

The IFO index for December is out, but the detail awaits releases next week. The headlines and sector news tell us what we already knew and that is, conditions are still deteriorating. The Business climate and Current situation indices are still firm-valued as they reside at or near the three-quarters mark of their respective ranges. The outlook index is less upbeat as it resides at the one-third mark. If we were assigning grades it would be 'Cs’ for climate and current and a ‘D’ for expectations. The IFO gauge has slipped more rapidly that it did in the 2005 episode.

Italy’s new orders are off in October, led by weakness in foreign orders on the month. But that drop only offsets the rise the month before. Domestic order weakness remains despite the 1.7% rise in October. Over three months both domestic and foreign orders are falling. Yr/Yr foreign order growth is still strong at +10.2%, while domestic orders are up by just 2.9% over 12-months. In the quarter to date, total orders are dropping at a 6.3% pace, while foreign orders are dropping at a 19% rate. Domestic orders in Q4 2007 are edging upward a pace of 1.9% at an annualized rate.