The sharp rise in gasoline prices over the past year has all but eaten up the payroll tax cut enacted late last year, advises Goldman Sachs via Fortune.com. The risk is that the ascent of fuel costs cuts sharply into consumer spending, which has been buoyant lately. “A key reason for concern is the sharp rise in gasoline prices so far in 2011 — nearly 70 cents per gallon — which is siphoning off household income at a run rate equivalent to $100 billion per year,” notes Goldman economist Andrew Tilton.
With the demand boost from the summer driving season just around the corner, some analysts warn that even higher prices may be coming. The question is how deeply gasoline prices bite into consumer finances? Prices are one signal in searching for an answer, and by that standard Joe Sixpack is spending the most on gasoline these days since the summer of 2008. Average regular gas prices in the U.S. were $3.791 a gallon last week, the Energy Information Administration reports–a rise of more than 90 cents a gallon from a year ago.
We can also look at retail gasoline station sales as a percentage of total retail sales for context. As you might expect, that measure has been rising too. As the chart below shows, sales of gasoline stations grabbed 10.7% of total retail commerce in the U.S. last month—the highest since October 2008. For perspective, the chart also tracks several other major categories of retail spending as a percentage of total retail activity.
The issue is deciding if rising fuel costs will divert enough retail spending away from other sectors of the economy to trigger slower growth or even recession. The answer, of course, lies in the future price of gasoline. Higher gas prices have “a measurable impact on the economy,” U.S. Treasury Secretary Tim Geithner said yesterday and so the economic recovery is “modestly” slower. He added, however, that “it’s an impact we can withstand, we can absorb, because the economy itself is still gradually getting stronger.” But if gasoline prices keep rising, it may be time to reassess Geithner’s optimism.
This much is clear: Higher energy costs inevitably bring changes in consumer habits. “In 2008 we spent 12 months with gas above $3” and consumers reacted, reminds David Portalatin of NPD Group, a consumer research firm. “Nearly half reduced their gas consumption by consolidated shopping trips, 29 percent cancelled or modified vacations, 25 percent found alternatives to driving. The more sustained price spike, the greater the impact.”
Short of a dramatic drop in fuel prices in the near future, it’s a safe bet that Joe Sixpack’s behavior will adjust to higher gas prices. Exactly what that means is to be determined, but change in some degree is almost certainly coming.