Yesterday (Monday) saw the release of the latest consumer expenditure and income figures. The short story is bearish — total consumer spending was up but gasoline spending was down — (maybe?) bad news for the RBOB contract. The long story is more involved, as we attempt to account for the weather and the true state of the economy.

Stephen Schork
Editor of
"The Schork Report"

As of February, total personal income rose by 0.01%, below analyst expectations of a 0.1% increase. Regardless, total consumer expenditure rose 0.3% to 10.35 trillion dollars, a 3.4% year-on-year surplus.

On the other hand, gasoline spending fell 1.3% to 334.9 billion dollars and reduced the year-on-year surplus from 47.79% in January to 33.2% in February. Given that expenditures rose and income fell, it is understandable that taking road trips was not consumers’ top priority — heating their homes took priority over driving their cars.

Expenditure on natural gas rose by 6%, drastically reducing the y-o-y deficit from 18.58% in January to just 4.14% in February. Similarly, spending on electricity utilities rose by 4.65%.

Unfortunately for the natural gas and coal bulls, suppliers ramped up production in a big way to meet demand, thus the natty contract and the dark spread (the cost of generating energy from coal) have been falling drastically.

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Returning to gasoline, how much of the drop in demand was due to weakness versus the weather? Traditionally, spending on gasoline is inversely related to public transportation. But for February, public transportation saw a commensurate 2.3% drop implying that consumers were not choosing to drive less, they were simply choosing to travel less.

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Thus a discretionary drop is not necessarily troubling. Warmer weather will lead to increased transportation, and consumers have demonstrated (with January’s 7.6% increase in gasoline expenditure) their willingness to drive.

More troubling may be the increasing cost of gasoline at the pump, as illustrated in the Chart of the Day in today’s issue of The Schork Report. In relative terms, gasoline prices at the pump averaged $2.71 in February, and consumers spent 3.24% of their income on gasoline and motor fuels. This is equivalent to March 2007, when retail prices averaged $2.66. In relative terms, it is well below the 4.20% of income consumers were spending during the summer of 2008, but well above the 2.78% historical average.

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Refiners have to consider the consumer demand threshold. They are hoping that despite lower incomes, consumers will pay prices above $3 as they did in ’08.

But consumers have significant new expenses; take for instance the growth of subscription communication.

Whereas a few years ago the average American had a land-line and basic cable, they now have unlimited calling/data plans, high-definition cable and high-speed Internet. Spending on cable and satellite television has increased 9.5% since 2005, the cost of internet access has risen 7.0% while cellular service spending has grown 5.55%. Over the same period, gasoline expenditure has fallen 11.3%.

Part of the problem is a better mousetrap: Internet now is faster than ever, television is clearer and phones are smarter. But, then again (see Chart of the Day in today’s issue of The Schork Report), is watching Snookie and the rest of the crew from Jersey Shore in High-Def really a priority? Because, gasoline kind of is; so when gasoline at the pump this summer is over $3, will Americans still want their MTV?

Another concern for the economy in general is the rate of saving, which dropped to its lowest point since November 2008. Some analysts consider the drop to 2.79% a positive signal — consumers are saving less because they feel confident in their jobs, and more spending leads to more jobs. On the other hand, consumers could be saving less because their expenditures are greater than their income.

Which scenario do you think is most likely? The bottom line is that we are less concerned with the drop in gasoline expenditure and more concerned about the economy as a whole. In this vein traders should keep looking closely at the macro-economic indicators to push the market. It appears that the highly quantitative, super-secret formula used to convert indicators to prices on Wall Street is:

“Not worse” + “Where’s my bonus” = Buy Buy Buy

Will a similar pattern play out with today’s consumer confidence and Friday’s payrolls figures? Regarding those we are cautiously optimistic – U.S. companies saw very strong earnings last quarter and record high share prices since the start of the year, obviously this encouraged them to hire more people, right? Right…?

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Stephen Schork is the Editor of The Schork Report and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.