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Friday, January 12, 2007

Retail And Gas

Sorry for not posting; the ISP has been down again! If low oil prices bores you, maybe you'll enjoy this collection of church bulletin bloopers. Work safe, and for some reason these make me howl:
The retail report confused me a bit - October and November's numbers were revised downward significantly. December's numbers were strong, but will December's numbers also be revised downward? Hopefully not, but in general I tend to mentally pencil in some revision if the revision trend has been consistent lately.

Crude oil is going low, even for February now. This morning Brent and light sweet were under $53. I assume OPEC will be meeting again, but the lower it goes the less impact further supply cuts will have. If gas prices were to fall significantly the economy could get a significant boost. Broader stimuli at this point is what we need.

What really concerns me is that the latest consumer credit report showed a huge jump in revolving credit. The split between revolving and non-revolving is also very high, and if we really are financing spending from credit cards, that surge will fade quickly.
Growth in Consumer Non-Revolving:
Sep: 0.5; Oct: -3.4; Nov: 3.0
Growth in Consumer Revolving:
Sep: 4.3; Oct: 4.2; Nov: 11.9
Total Consumer Credit Growth:
Sep: 1.9; Oct: -.06; Nov: 6.2
Hopefully December numbers won't look like this. If they do, the expectation would be that consumers would get the bills and begin to pull back on spending in the first quarter. That would be unfortunate, because the first quarter is when the new home building should start to tail off. Over the last few months starts have been strong, but new building permits are down very substantially.

On the other hand, if gas prices do fall significantly, perhaps the broad level of stimulus would offset the pullbacks and keep us in growth territory. There's no doubt that we are taking a whack in residential fixed investment, and resets will continue to hurt some households and constrain their spending, now that the rapid appreciation in home values doesn't allow those households to refi en masse again into initial low rates and low payments. This will hurt consumption. Financing spending by rolling the debt into neg-am, teaser rate mortgages and interest-only mortgages provides for lower debt repayments on consumer spending than if the balances remained on the credit cards. What controls consumer spending is the monthly ding (if anything controls it), not the overall total, which is why we have ended up with negative savings for over a year and a half.

But the number of households affected by resets is much, much lower than the number of households affected by lower gas prices. So far gas hasn't dropped much at the pump, but there's a good supply and with crude prices this low, these prices should come down significantly. I sure hope to see the gas wars begin!!!

This is the first time I have seen a set of circumstances that could offer hope to sustain real growth through the first quarter, and the first quarter is crucial. If 1stQ GDP is negative or under .8%, it is likely that a set of reinforcing downward trends will control the second quarter.

I have seen many very optimistic GDP predictions for the fourth quarter. We'll see. I have my fingers crossed.

Please keep writing about oil and gas. I'm a regular reader and I'm deep in the oil & gas industry. Your viewpoint from a very diferent perspective than what I read in the trades is most welcome.


It's a market that I would not trade in, personally. There are too many externals that can produce wide swings right now, the chief of which are political/military.

I guess if you sit on it day by day, watch the news carefully and have a good grasp of psychology, it's doable. I prefer easier money!

I think gas prices and crude oil prices will have more impact on the US 2007 economy than most of us would like to admit.
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