Schork Oil Outlook: Is Gasoline Stifling Recovery?
Founder and Editor, The Schork Report
On Wednesday of last week, the Bureau of Economic Analysis released its latest personal income and expenditure figures. The former came in at 0.5% for October, above analyst expectations of a 0.4% increase, while expenditure, or spending, came in at 0.4%, slightly below analyst expectations of a 0.5% increase, but much better than the 0.2% increase seen in September.
The gain in income helped push the year-on-year surplus from 3.69% to 4.09%, its widest all year and a far sight better than the 1.35% seen in January.
The source of income is also encouraging, as government unemployed insurance benefits dropped 4.05% to $127.9bn, the second lowest value since June 2009 and an encouraging number after August 2010’s spike to $150.5bn. An increase in employment jibes with the sharp drop in initial jobless claims seen last week.
Personal saving as a percentage of disposable personal income rose 0.10% from 5.6% to 5.7%, but remains well below the 6.3% seen in June. The Schork Report advises readers to keep in mind that historically the savings rate increases by 0.16% between September and October, so a smaller number suggests that consumer confidence is returning.
The increase in income from private industries came to 0.63% as opposed to income from the government, which rose by 0.21%. In comparison, private industry historically increases by 0.39% in October while the government sees an increase of 0.24%. In cumulative terms, income from private industries has increased by 3.83% since the start of the year in nominal terms while government income has seen a 0.15% decline.
All told, it is encouraging to see an increase in income, though we will look for a drop in the savings rate to fuel holiday shopping season demand.
Energy Picture: Mixed
In terms of expenditure, the picture is mixed for energy. Expenditure on gasoline and other energy goods increased by 3.55% to $361.27bn, its highest point since February 2010. At the same time, average prices at the pump rose 4.48% in October, and our regression would place expenditure growth closer to 2.68% (or $358.23bn) so growth could be considered better than expected.
However, we are concerned about the relative expense of gasoline. Consider that gasoline expenditure as a percentage of total expenditure (PCE%GAS) rose to 3.45% i.e., consumers are spending around three and a half cents of every dollar on gasoline. This is the highest point since October 2008, AKA the heart of the recession. The question now is whether spending so much on gasoline will cut down on spending in other areas, slowing down the recovery.
Consider that PCE%GAS last peaked at 3.44% in April 2010. This was also the month in which the unemployment rate hit a local peak of 9.90%. Conversely, PCE%GAS hit a local bottom in June at 3.15%, and the unemployment rate hit a low of 9.5% in the same month. Since June, the PCE%GAS has been rising, and so too has the unemployment rate. Given the vast macro-economic forces at work, it is hard to draw direct causality, but the effects from a psychological and confidence perspective are implicit, and the correlation coefficient stands at a firm 0.678.
Historically speaking, PCE%GAS at 3.44% seems reasonable — we entered the recession in January 2008 with a rate of 4.23%, while the early '80s saw a rate as high as 6.16%. In the sixteen months since the end of the recession, the PCE%GAS rate has risen by just 0.08%. However, as illustrated in today’s issue of The Schork Report, five of the last seven recessions saw PCE%GAS fall or flatten at the end of the recession. The early 90’s recession saw the rate rise by 0.003% after sixteen months, the 1982 recession saw the rate drop by 0.11% and the early 70’s recession saw the rate drop by 0.06% over the same period.
The only two recessions which saw PCE%GAS rise were the February 1980 – July 1980 recession, which was followed by the more severe double dip; and the April-November 2001 recession which led to the Great Recession and the commodity bubble. Not encouraging.
The bottom line is that we are not calling, and never have called, for a double-dip recession. Regardless, it is not hard to see that this recovery is sluggish. China has already capped the rate of energy prices for consumers in an attempt to curb inflation. We have dodged the bullet of deflation, but how long before consumers throttle spending to fuel their cars? We will look for a lower PCE%GAS number if we are to see the economy rocket higher.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.