Retail Sentiment and Gas Prices

Good news! Gas prices are down, and economic data are starting to show the fruit. Exhibit A: July retail sales, which were flat overall as sales excluding gas stations rose. That largely confirms the latest U-Michigan Consumer Sentiment Index, which inched higher in July and August as consumers expressed relief about the easing pain at the pump. We don’t see this as a big economic change, but it should help shore up sentiment—part of the late-2022 wave of falling uncertainty we expect.

Unlike the full consumer spending report, retail sales aren’t adjusted for inflation. Accordingly, sharp price swings can skew the data. That happened with gas station sales in July: They fell -1.8% m/m, heavily influenced by falling prices.^[i] The national average price of regular unleaded is now down -21.4% from its mid-June peak, which appears to have freed up some money for more discretionary spending last month.^[ii] Excluding gas stations, retail sales rose 0.2% m/m. Excluding motor vehicles and parts as well (given their falls stemmed more from shortages than weak demand), sales jumped 0.7% m/m.^[iii] This comparison isn’t apples-to-apples, but to illustrate a practice we see in publications often: That far exceeds the monthly change in both headline and core (ex. food and energy) prices in the month, implying growth stemmed from higher demand, not inflation.

We won’t go so far as to call this some big economic positive or a sign the US is set to avoid a recession, as some outlets did Wednesday. Spending on gasoline is still spending—it adds to GDP. Changes in gas prices tend to shift where people spend without significantly altering how much they spend. Nor do we think this is a sign that Consumer Discretionary stocks’ earnings are about to categorically turn the corner after some high-profile Q2 disappointments. Sales at clothing stores and general merchandise stores (e.g., department stores) fell in July, and as of June (the latest data available) both had big inventory piles to work through.^[iv] There may yet be more earnings weakness ahead as some firms continue clearing stockpiles and reorienting toward consumers’ post-pandemic preferences. Mind you, we think stocks are looking well past this, but it is a reminder to keep realistic expectations for—and not get hung up on—near-term earnings data.

Mostly, we see retail sales as a sentiment factor right now. High gas prices and overall inflation led investors to view every report with trepidation and hunt for clues as to how badly prices were forcing people to cut back. A whole cottage industry seemed devoted to deflating retail sales with CPI to estimate the pain, even though the series are quite different. If nothing else, the combination of falling gas prices and fast-rising sales in categories unrelated to cars should help quell this instinct, letting investors move on from one of this year’s biggest fears.

As we have discussed before, we think this year’s downturn was largely sentiment-driven. Where most corrections (typically sentiment-fueled declines of -10% to -20%) feature one to two scare stories, this year’s downturn had about seven or eight, depending on how you tally overlapping worries: inflation, supply chains, energy shortages, oil prices, political rancor, new COVID variants sparking more lockdowns, interest rates and the dollar, just to name a few. They collided hard enough to turn the decline into a bear market, which is a drop of -20% or worse (and would typically have a fundamental cause). But now they seem to be slowly starting to fade, with falling gas prices and improving discretionary consumption just one example. Uncertainty is also falling on the supply chain front, with bottlenecks and shortages easing. Long-term interest rates have calmed a bit. And perhaps most crucially, November’s midterms and the increased gridlock they are likely to bring are coming into sharper focus. That is normally a big tailwind late in midterm years, and it appears to be arriving right on schedule.

None of this precludes more negativity ahead. Sentiment is fickle and unpredictable. But every bit of falling uncertainty helps, and to the extent retail sales contribute, we think that is a positive.