United States

Lower gas prices to boost discretionary incomes ahead of holiday shopping season

INSIGHT ARTICLE  | 

The recent decline in gasoline prices has put an additional $50 billion in personal disposable income into the pockets of U.S. households, which should boost spending heading into the holiday shopping season. The net effect of lower gas prices and added consumer discretionary income should bolster the fortunes of middle market companies in the retail, food, beverages, fashion and home furnishings industries. It may also boost demand for durables and electronics, which would positively affect industrial products and technology sector companies.

Even better, forward-looking wholesale gasoline prices indicate that retail prices at the pump may fall another 15 percent in coming days. If that happens, it would inject another $34 billion into household balance sheets and enable even more consumer outlays on a wide array of discretionary items.

Gasoline Futures Pointing Toward 15% Decline in Retail Prices

Source: McGladrey, Bloomberg

The 14 percent decline in the price of retail gasoline was primarily caused by the 27 percent drop in the global price of oil. The new supply of oil coming to market in the U.S. is outpacing demand as economies in the euro zone, China and emerging markets cool. In addition, the 10 percent increase in the value of the U.S. dollar against the euro, and the dollar’s 7 percent rise against a trade-weighted basket of global currencies, will likely further damp overall economic activity in the euro zone and China because the oil is priced in dollars, which increases the total cost of energy and production in those economies.

As long as Saudi Arabia does not change its daily production schedule, the decline in oil prices should continue. Global benchmark Brent crude is currently $84.34 per barrel, compared with $81.84 per barrel for the U.S. benchmark West Texas intermediate crude. Given that the breakeven point for U.S. production stands at around $60 dollars per barrel, oil prices may fall much further if the status quo holds or the European and Chinese economies slip into recession.

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