Retail Sputtering from Exhaust of High Gas Prices

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With gas prices again causing pain at the pump for consumers, the United States and the International Energy Agency intervened by releasing a combined 60 million barrels of oil from their emergency oil reserves in an effort to bring down prices.

Gasoline prices have dipped as the Fourth of July weekend approaches, but the high cost of fuel is still roiling retailers by taking money out of consumers' pockets and providing a strong disincentive for driving to the local mall or shopping center. And the impact is expected to continue for a few months at least.

Retail sales drifted into negative territory in May after 10 consecutive months of gains, according Garrick H. Brown, research director for Terranomics in Sacramento. The continued impact of gas pricing, plus weak May car sales combined to finally send these numbers into the red.

Several reasons have been advanced for the slowdown in spending, including bad weather (which hampered construction) and the Japanese earthquake (which disrupted industrial activity), adding to the lingering drag from falling home prices and state-government cutbacks.

However, says Kevin White, a real estate strategist for CoStar Group, "While these factors have no doubt played a role, it seems clear that the spike in oil prices from $90/barrel late last year to nearly $115/barrel in April deserves most of the blame."

White points out that while in the first three months of the year, U.S. consumer spending rose at its fastest pace since early 2007, real gains were offset by inflation.

"Higher inflation, driven largely by rising gas prices, neutralized most of these gains, reducing 'real' (inflation-adjusted) consumption growth to a modest 2%," White reported to CoStar clients this week. "Americans spent liberally, but their dollars did not go as far. Since consumption accounts for 70% of U.S. GDP, the hit to economic growth was palpable."

Oil prices have since retreated from their $115/barrel, but not quickly enough to prevent energy from taking a toll on second quarter performance. In addition, current prices are still more than prices at the same time last summer.

"Although consumers will see the cash-flow benefit soon, some of the lagged, second-round effects of the hit from gas earlier this year - weaker stock prices and job growth - could weigh on spending in the third quarter. I don't expect we'll really pick up momentum until the fourth quarter," White said.

That sentiment was backed up the Research Division of Federal Reserve Bank of St. Louis in a report this week entitled 'Where is an Oil Shock?' That report concludes that sharp increases in oil prices affect economic activity adversely, but even sharp decreases in oil prices have no effect on improving the economy.

White is advising real estate clients to continue to stress their assumptions against downside scenarios.

Peter Muoio, senior principal at real estate research firm Maximus Advisors and former global head of Deutsche Bank Real Estate Research, reported this month that stabilization of consumer spending bodes well for recovery, though many risk factors have prevented a solid improvement in most metro areas.

"Recent increases in the price of gasoline and food will directly and negatively impact discretionary spending, threatening chain stores and shopping centers," Muoio said. "With the growing prevalence of e-commerce and online retailers, we could be left with a glut of vacant retail space as in-store demand shrinks."

"While high gas prices are the immediate culprit of the most recent decline in retail sales, the commercial real estate industry needs to start asking when corporate America will create the necessary employment growth that leads to higher wages, the needed counter to rising gas prices," added CoStar Group Senior Real Estate Strategist Christopher N. Macke.

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