U.S. Gas Prices Begin to Rise as Retail Sales Disappoint

Gas prices are rising in the United States and are expected to rise further, limiting the possibility that Americans will spend more on discretionary goods and services.

In late 2014, many economists expected a rise in discretionary consumer spending and thus higher revenues for the retail sector as cheaper energy costs gave Americans more purchasing power to spend on discretionary goods. Since then, retail sales have consistently disappointed expectations, remaining flat in April. This has left many scratching their heads and rethinking their economic models.

Gas prices are rising in the United States and are expected to rise further, limiting the possibility that Americans will spend more on discretionary goods and services.

In late 2014, many economists expected a rise in discretionary consumer spending and thus higher revenues for the retail sector as cheaper energy costs gave Americans more purchasing power to spend on discretionary goods. Since then, retail sales have consistently disappointed expectations, remaining flat in April. This has left many scratching their heads and rethinking their economic models.

Now the expectations of a stronger, resurgent U.S. consumer are getting bleaker, since gas prices are rising and some of that savings at the pump is evaporating.

Gas prices rose 22 cents on average in the United States over the last three weeks. Now the average price for a regular gallon of gasoline in the U.S. is $2.80, while mid-grade gas has risen to $3 on average. The lowest-priced gas was in Louisiana, at $2.32, while the highest price gas was in Los Angeles, at $3.95 per gallon.

Supplies of oil and gasoline remain at near record-highs, so further increases in gas prices are likely to remain slow. However, crude oil has seen a 50% jump in prices in recent weeks, and some analysts expect further price growth to translate into higher energy costs for Americans.

Weak Retail Sales

The higher costs for energy are likely to remain a headwind for the country, particularly as lower costs failed to boost aggregate demand for retail goods and services in recent months.

Several indicators show weakening demand from Americans, and evidence of a national slowdown are mounting. In April, consumer retail sales were flat, despite expectations of a 0.2% growth.

More recently, a study of consumer behavior shows that Americans are less confident than they used to be, and concerns are mounting that the economy is weakening. The University of Michigan Consumer Sentiment Index fell to a 7-month low at 88.6 in May, down from 95.9 in April, with the Consumer Expectations Index falling to 81.5 from 88.8.

Chief Economist Richard Curtain said of the study:  “Consumers became increasingly convinced that there would be no quick and robust rebound following the dismal 1st quarter. The decline was widespread among all age and income subgroups as well as across all regions of the country.”

“A Disappointment for Years”

Some economists are warning that economic growth is likely to disappoint for a long time. Lawrence Summers famously said that the United States and the world has entered a stage of “secular stagnation,” in which growth levels refuse to rise to the average seen over the last hundred years.

Echoing the sentiment, economist and researcher at the Mercatus Center, a Koch Industries funded think-tank, said in a New York Times editorial that disappointing growth is likely to remain, saying that we “may be … scaling back our ambitions for the economy — reinforcing trends that were already underway.” Cowen argues this humbler economy is largely the result of falling wages, which have declined 7% in real terms since 2000 for recent college graduates.