US consumers spending their savings on energy

How much are Americans spending on gasoline – and is it too much, given the state of the economy?

Stephen Schork of the Schork Report has taken another look at the energy component of the latest personal consumption expenditure data, and found some worrying signs compared to other macro-economic figures.

Firstly, he says, the optimistic rumblings around the latest data set are unwarranted:

For instance, take the 0.1% increase in gross income. Factor in taxation and we find that disposable income (the amount consumers have to save or spend) actually dropped 0.4% between December and January. Where did people find the cash for increased expenditure? They broke open the piggy bank – total savings dropped by 21.5% to the lowest point since October 2008, while saving as a percentage of total disposable income fell from 4.22% in December to 3.32% in January. The talking heads seem to believe that low interest rates are encouraging people to spend money instead of saving it, and take out loans (or credit card debt) to fund high definition TV’s, a bullish indicator.

Schork doesn’t buy this explanation – there are too many bearish indicators, he says, such as consumer confidence and average duration of unemployment.

He continues (emphasis his):

It seems more likely that consumers are pulling money out of savings to cover the essentials their income can’t meet. Expenditure on food purchased for off-premises consumption (groceries at the supermarket) only grew by 1.02%, but expenditure on gasoline and motor fuels grew by 7.4%, in line with prices at the pump increasing by 3.7%.

In January, consumers spent 3.58% of every dollar on energy, up from 3.36% in December. Wall Street assumes this can go higher, but they may be overestimating consumer strength.

Schork says the percentage of PCE spent on energy (including gasoline) spent most of the last 10 years in a ‘super trend’ of rising 0.14 per cent every month – as this image shows:

Schork Report

Source: Schork Report

However the 2008 oil price spike broke above that trend, while last year saw an average of 0.9 per cent. In January: 0.22 per cent. Although this appears to be returning to the historical norm, Schork writes, how sustainable is it if Americans are already dipping into their savings to pay for essentials?

He concludes:

The bottom line is that we consider yesterday’s PCE numbers very bearish. Consumers managed to pull savings out to pay for higher energy costs, but spending from your savings is rarely preferable and never sustainable. Consumer spending could collapse – thus refiners will not be able to pass higher crude oil costs on to consumers as they did during 2007 and 2008. We will be taking an extended look at refiners’ margins in tomorrow’s report, but increasing crude oil prices will spell trouble for the refiner and the consumer.

Just what the refiners – and the consumers – don’t need, then.

Related links:

Personal consumption data portend weak oil demand (FT Energy Source)
Opec probably would care if oil hit $100 (FT Energy Source)
More gloom about oil prices and the recovery (FT Energy Source)

Energy Source is no longer updated but it remains open as an archive.

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