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Have Low Gas Prices Finally Boosted Broader Retail Sales?

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August 11, 2015
Will low gas prices bump up retail sales?

It’s a busy week for government-crunched national retail sales figures and chain-store earnings results. These reports—which earlier this year lacked lift from low gas prices and steady job growth—could be key pieces for the Federal Reserve’s September interest rate deliberations and pre-Fed stock positioning.

Meanwhile, receipts are smaller at the gas station. Pump prices continued to fall in the latest week and month, begging the question: are consumers finally spending this savings?

The national average for gasoline slid 5.4 cents per gallon in the last week, down to $2.60 per gallon, while the national average has decreased 16.2 cents per gallon during the last month, and some 88 cents from a year earlier, according to GasBuddy.com.

But those pennies are piling up in most folks’ savings accounts. That’s good for them, but not so great for an economy running below potential.

"One of the drawbacks to the economy in recent years has been consumers’ reluctance to spend. Consumers have been inclined to build a cushion of savings. But recent positive earnings trends do suggest strength in consumer spending," says Patrick J. O'Hare, chief market strategist at Briefing.com.

The Briefing.com economists’ consensus forecast expects a 0.5% rise in July retail sales, along with a 0.5% rise in sales excluding autos. The report will be released Thursday morning. Also on tap this week: several retailers are set to report quarterly earnings, with Macy's (M) due out on Wednesday and Nordstrom (JWN) and Kohl's (KSS) on Thursday, among others.

Fed is Watching, Too

"The retail sales report on Thursday will be really important. From the Fed point of view, the housing market has been hot, auto sales have been hot, and employment has been great. Retail sales are the one area that’s been weak," says JJ Kinahan, chief strategist at TD Ameritrade.

"If we see a strong retail sales number, it could solidify the growing believe that we will see a September rate rise from the Fed and it could give confidence in the economy ahead," he adds.

Consumer spending accounts for almost 70% of U.S. gross domestic product, broken down into roughly one-third spent on goods and the other two-thirds spent on services, O'Hare notes. Recent numbers have been volatile, but they are important to broader economic trends. "There tends to be a decent correlation between changes in retail sales and changes in GDP," O'Hare says.

Looking back at last month, June's retail sales disappointed with a 0.3% decline in overall sales. "We are likely to see a bounce back this month. The July employment report indicated solid growth in employee earnings, and that’s helping to contribute to positive expectations for retail sales in July," says O'Hare. Also, "the drop in gasoline process is a big positive for consumers and gives them more discretionary spending money.”

Investing Angle

"If you are a believer that people are shopping and buying, retailers might be good companies to research,” Kinahan notes. That includes starting with tracking the earnings calendar on TD Ameritrade’s thinkorswim® platform, shown in figure 1.

“If retailers get hit on earnings, it’s likely that some investors could take advantage of a price pullback, especially if they’re long-term bullish on consumer spending,” he said.

"In the retail sales report breakdown, look at retailers, department stores, restaurants, online sales—watch trends in those areas over a three-month basis and it could give you an idea of where the strength lies," O'Hare concluded. 

Earnings calendar

FIGURE 1: BE PREPARED. Clients can log in to the thinkorswim® platform and click MarketWatch > Calendar. At the calendar screen, uncheck all options except “Earnings.” At the top right, select your time horizon (day, week, month, list). Select “Week” to pull up earnings for just the select week. Clients can narrow the displays by adding a watchlist. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Daily Dose

Follow JJ Kinahan’s Market Update for the latest on energy prices, earnings, economic reports, and more.

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