Gas and Food Prices Take Bite From January Spending

Stock investors have long known to gauge the US consumer. Since consumer spending accounts for approximately 70% of our economy, small changes in buying are felt much more powerfully in GDP. This makes purchasing trends one of the most powerful influences on stock prices.

And what has the US consumer been doing? Why, spending of course! Contrary to the postulation about a new consumer normal a few years ago, the good old average Joe and Jane have been buying, and, increasing that buying (sans a few hiccups) since 2nd quarter 2009.

The US GDP is now at an all time high, and total spending is actually close or over pre recession levels. The future is finally looking bright again, right?

While things are looking up overall, I want to call your attention to a cautionary piece of data: today's January Retail Sales report. Sales did rise, but only 0.3% m/m, less than the 0.5% expected by analysts.

Sure, bad weather explains some of it, building materials fell a resounding 2.9%. Too cold for working outside! But there's 2 other categories that are a bit more concerning than 1 month of bad weather. That's Gas and Food.

Let's take a look at the actual changes before continuing, these come courtesy of everyone's favorite government dept, The US Census Bureau.

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You'll see that gasoline sales rose 1.4% from December 2010. Now gas isn't something that most people buy out of the desire to just burn for fun, or keep around the house because it smells so nice, no, gasoline demand tends to be inelastic in the short term. People buy the gas they need because they must drive to work, the store and to school. With gasoline now over $3/gallon, it's probable that much of this sales increase is due to gasoline prices.

Grocery store sales? Those also rose 1.4%. Now, food is a bit more elastic because people can trade up or down in quality, but like gasoline, people generally buy the same volume of groceries week to week. Food prices are of course, affected by transportation costs, which brings us back again to petrol prices.

So if gas and food rose so much, and overall spending rose only a small amount, something must have been down. Where did the cuts occur, other than in the home building supplies we already know about? Exactly where you'd expect: stuff you don't have to buy. Music/book/hobbies down 1.3%. Restaurants down .7%, furniture down .3% and clothing also down .3%. Yep, it came from discretionary purchases.

What that likely means, and it's not a real stretch of common sense, is that the higher gas prices go, the less people have to spend on things they like. And as I said earlier, when consumers change their spending even small amounts, GDP feels it. There's even a theory floating around that says the great recession was only partly caused by the financial crisis in 2008; rather that the sky high price of oil was the real culprit for the recession.

Now, before anyone panics, gas expenditures could be part of rising employment. Or gas prices may even, gasp, come down over the next few months as emerging markets like China try to put the lid on their growth and inflation. There is no reason to run for the hills, but this is something worth watching.

While I'm more bull than bear, after all, spending is still rising, I think it's important we keep an eye on gas prices for the next few months. If they continue their ascent, we may see a slowdown in both consumer discretionary spending and overall growth, and we all may need to adjust our investments accordingly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.