American consumers are always concerned with their financial situation and their spending. Prices of given goods can drive spending habits across all types of consumers. With the residual effects of the COVID-19 pandemic and the economic fallout from the Russian invasion of Ukraine, many American consumers find themselves in a state of constant financial uncertainty.
These major world events influence consumer spending drastically, and the effects could be seen earlier this year, specifically as gas prices crept toward peaks in June. From April to May, consumer spending on gas increased 4%, contributing to an increase of 43.2% from a year earlier. When looking at spending on retail goods outside of gas stations and grocery stores, consumers were spending 1% less in May compared to April. The implication is that because gas prices have increased similarly to the spring, consumers may have less ability to spend on other goods.
The significance of these spring numbers is that we saw what happened to consumer spending on goods leading up to the gas price peak in June. Over the first half of the year, prices increased from an average of $3.315 in January to an average of $4.929 in June. Since then, prices have been steadily declining month over month until October as domestic supply began to meet the high customer demand. However, recently the national average has slightly increased to $3.815 compared to $3.700 in September. While this average is significantly lower than June, it is over 50 cents greater than the 2021 October average ($3.291) and over a dollar greater than 2020 averages.
The important distinction about this increase from September is that while the national average had increased by about 7 cents a gallon last month, more than half of the 50 states have seen a weekly decline in gas prices: similar to the recent monthly trend after June. Certain regions are seeing increased gas prices because of refinery outages at plants in the Midwest and on the West coast. The most significant increases can be seen in California (10% week over week) and Alaska (11% week over week) due to the West coast outages as well as in Ohio (11 cents) and Illinois (18 cents) due to the Midwest outages.
The higher fuel prices, particularly in these regions, are forcing retailers to pivot from more conventional methods of transportation of goods. Transportation providers are increasing delivery charges to offset their increased costs. Some retailers are even prompting suppliers to help them cover their fuel costs for transportation from supplier warehouses. We are seeing retailers start to rely on coal and renewable energies to maintain their supply chains across the country. The net effect of these changes is that retailers are forced to increase prices in order to pass on their transportation costs to customers. The issue with this is that consumer spending slowed down over the course of the year, resulting in retailers’ holding excess inventories. All this inventory piling up has a negative effect on the overall growth of the economy and health of these retail businesses. Now, with inventories hitting record highs, the traditional holiday discounts are starting to become more prevalent earlier to help get rid of excess inventory. Luckily for retailers, consumers have become more willing to spend during this gas price hike now, as we head into the holiday season.
Both discussed time periods in the spring (April-June) and recently in the late summer (August-September) saw increases in gas prices, which in the spring led to the decrease in consumer spending, but the time of year is key when discussing the consumer reaction. To compare consumer spending on goods in the months of August and September, August saw a decrease in consumer spending overall while September saw an increase. The driving factor of these changes is the difference in gas and energy. In August, gas spending decreased by over $40B but in September, gas spending decreased by only about $8B. We can see the effects of increasing gas prices as the year wanes, but what is key about the difference between these two months is that spending in every single goods category tracked by the Department of Commerce increased by at least $900M in September. Consumers are spending more on goods in spite of increased gas prices.
It is important to note that Americans’ spending tends to increase over the holiday season. In October, non-farm payrolls added increased by about 261,000. These people with new jobs and their willingness to spend could be the key to pushing the American economy toward healthy progress moving forward, similar to what we have seen over the course of Q3, where the US GDP saw growth of 0.6%. The long-term health of retailers during the holiday season is yet to be determined. If consumer spending continues to increase through to the new year, that could be the stimulant needed to help abate the negative effects of the rising cost of fuel in significant regions of the country.
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