Although corporate earnings reports for the quarter ending in December have officially started this week, the news flow and the stock market have been relatively quiet.
Little domestic economic data hit the tape this week, but that will change alongside a pickup in corporate earnings next week. One noteworthy piece of economic news came in the form of the Federal Reserve’s January Beige Book, which showed that the U.S. economy improved somewhat across all regions in the final six weeks of 2011, boosted by holiday sales, but noted that overall growth was restrained by continued weakness in the housing market.
The question that jumps out is how sustainable that trend is, which calls into question the ability of consumers to sustain higher spending now that the holiday season has passed. There are several reasons to think that spending will not continue, including the jobless rate of 8.5 percent, heavy debt burdens on households and prospects for higher food and energy prices. As we face another year of rising input costs, a survey by Nation’s Restaurant News shows that many restaurant chains will pass higher prices on to consumers in the range of 1 percent to 3 percent.
In terms of energy, fuel prices were falling during the end of 2011, reaching a low of $3.23 per gallon of regular gas during the week of Dec. 19, but prices at the pump have been on the rise since then. Per data aggregated by the U.S. Energy Information Administration, prices of regular gas have risen nearly 5 percent over the past few weeks to $3.38 per gallon. While the rise so far has been modest, the year-over-year comparison is far more telling as gas prices for the week of Jan. 9 are up $0.29 per gallon compared with the same period in 2011.
There has been much talk about the health and psyche of the consumer. When we examine the link between gas prices at the start of the year and where they tend to peak during the year, the consumer once again becomes a concern. Over the past three years, start-to-peak gas prices have climbed an average of 33 percent, ranging from a low of 10 percent in 2010 to a high of 60 percent in 2009. In 2011, average national gas prices rose 29 percent on a start-to-peak basis. Those increases are not limited to the past three years as average U.S. gasoline prices have climbed in 11 of the past 12 years. An increase toward the low end of the three-year range suggests gas prices could climb past $3.80 per gallon while an increase in line with the three-year average derives a peak gas price north of $4.25 per gallon. That would be well above the 2011 peak price, which was just below $4 per gallon.
While it is not difficult to apply sandbox math in the form of what-if scenarios and sensitivity tests, there are several reasons from a fundamental perspective that support the notion of rising gas prices in 2011, including the risk of a second Arab Spring as well as tight gasoline supplies partly because refiners are shifting capacity from gasoline production to diesel. That tightness reflects the continued growth in diesel fuel exports, which could be exacerbated if the U.S. economy accelerates in coming months and Iran closes the Strait of Hormuz, a key passage for oil transport.
As the news and data flow resume along with corporate earnings next week, one key data set I will be watching is the producer as well as consumer price indexes for December.
More as it develops.
• Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at firstname.lastname@example.org. Follow him on Twitter @ChrisJVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.