Tuesday, October 16, 2012

Stephen Schork: Consumer Inelasticity at the Pump Wanes

Equity markets in the U.S. got a boost yesterday morning after the U.S. Commerce Department showed a large 1.1% jump in advanced retail sales for the month of September. A survey conducted by Bloomberg showed a consensus forecast 0.8% rise.

However, similar to what we saw back with the July report, it seems that the Commerce Department factored in a heavy (843 bp) upward bias in its headline figure for September. Had the Commerce not adjusted last month’s figure, then sales would have come in close to market expectations of 0.8% growth; which btw, is a healthy number.

The adjustment amounted to a $22.2 billion boost to September retail sales to $412.9 billion.

The upward dollar adjustment was 1.8× greater than last year’s figure and 1.5× greater than the 2006-2010 average. Moreover, it was the largest, by far, such adjustment of past 20 Septembers.

Retail sales data is adjusted by Commerce to account for seasonal, business day and holiday differences. To this effect, this year’s Labor Day holiday fell on the first business day of the month, i.e. September 03rd.

Given when this year’s holiday fell, there were only 19 business days this September; as opposed to 21 business days for September 2011.

As such, the Commerce Department’s statistical hocus pocus is designed (in theory) to adjust for the loss of 2 business days this September.

Bottom line, like all models, forecasts are only as good as the assumptions programed into them. Therefore, we will take the adjusted 1.1% growth in September sales as a positive for the economy. After all, the stock market loved this report… and those guys are never wrong.

Yet, just keep in mind that Commerce’s seasonal factor will subtract 423 bps from October retail sales… and, that is even before we can talk about the 5.4% spiked in California’s retail gasoline prices this month.

While we are on the subject of retail sales and gasoline, according to yesterday’s report, gasoline station receipts (unadjusted) tumbled in September as consumers turned a blind eye to the cost of whatever Apple is selling, but balked as retail gasoline climbed above $3.80 on the national average.

Receipts fell to $46.56 billion, down from $49.49 billion in August. In comparative terms, retail gasoline averaged around $3.722 per gallon in August and then climbed to $3.849 in September. In other words, a $0.127 per gallon rise in price generated a $2.92 billion drop in receipts.

If that seems counterintuitive to you, don’t fret, you are correct.

September’s receipts decoupled from the polynomial regression for this timestep, i.e. receipts were out of line with historical norms given the cost per gallon.

How much longer can NYMEX gasoline (RBOB) futures maintain these lofty levels if motorists are unwilling (or unable) to pony up when gas at the pump moves above $3.60?

Thus, we are left to surmise that in spite of strong consumer spending elsewhere in the economy, consumers pulled back at the pump.

As illustrated in today’s issue of The Schork Report we see that this event has clearly taken hold. As the real cost of gasoline rises above $3.60 per gallon, consumers respond by driving fewer miles. Therefore, fewer miles and $115/b Brent crude oil means fewer dollars on the bottom line for refiners and marketers.

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