Can cheap gas save the holidays?
Posted
Nov 21 2008, 06:04 PM
by
Anthony Mirhaydari
Rating:
In less than a week, beleaguered consumers will engage in the perennial Black Friday kickoff to the holiday shopping season. The big question is whether post-turkey euphoria and circa-2005 gas prices will open wallets slammed shut by rising unemployment, wilted retirement accounts, cratered home equity, and tighter credit conditions.
The economists over at ISI Group in New York think the shopping season is "likely to be a disaster" as history shows a 61% correlation between holiday sales and stock market performance heading into the fourth quarter. Based on this relationship, and other factors, they are looking for consumer spending to end the year down 1.3% -- the lowest level in 34 years.
But can rapidly falling gasoline offset these loses and bolster consumer confidence enough to salvage the season? With crude oil currently trading near $50 a barrel, we could be looking at a $200 billion "stealth stimulus" concentrated on those segments of the population weakened the most by current economic pressures.
Compared to last spring's $120 billion fiscal stimulus package, this windfall is definitely big enough to make a difference assuming the money gets spent. The risk is that people will decide to pay down debt and increase their savings instead.
Whatever happens over the next few months, the fundamental story hasn't changed: The great reversal of the American economy's reliance on the consumer is underway. Since 1983, the percentage of GDP tied to consumer spending increased from 64% to 71% as the U.S. savings rate fell from 12% into negative territory. ISI thinks the savings rate will probably return to 5%, which would reduce consumers' GDP contribution to 66%. We are halfway there as the monthly savings rate has already increased to around 2.4%.
As this unfolds, investors will continue to punish sectors of the economy tied to discretionary consumer expenditures. Likely targets include mall anchors Macy's and JC Penny, specialty and high-end retailers like Abercrombie & Fitch and Nordstrom, casino and resort operators like MGM Mirage and Las Vegas Sands, and cruise line operators Carnival and Royal Caribbean.
So the good news is that cheap gas could give the economy something of a respite over the next few months. The bad news is we would find ourselves in something analagous to the eye of a hurricane -- with the worst yet to come.
Disclosure: I don’t own or control shares in any of the companies mentioned. I can be contacted at anthony.mirhaydari@live.com
Related reading:
How bad is it? Don't ask.
Why bailout won't save Detroit
The 'frugal future' has arrived
Why oil is heading to $200+ a barrel
