What is causing the current drop in the price of gas


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Cheaper Gasoline Fuels Retail Hopes

Holiday Shopping Gets an Unexpected Lift From Tumbling Fuel Prices

By JOSH MITCHELL and SUZANNE KAPNER

American retailers are getting a gift just in time for the holidays: a sharp drop in gasoline prices that is delivering a welcome boost to the pocketbooks of U.S. consumers.

Savings at the pump propelled sales across retailers in November, a new economic report showed, buoying hopes for the final stretch of the holiday shopping season. The jolt to consumer spending power, after years of weak wage growth and other headwinds, appears set to continue after U.S. oil prices slipped below $60 a barrel.

Cheaper gas-to just below $2.50 a gallon in many places-coupled with job growth running at the best annual pace since 1999 are converging to brighten the near-term outlook for consumer spending, retailers said.

"Consumers are fairly optimistic," said Jay Stein, chief executive of Stein Mart Inc., a Florida-based chain of 275 discount-clothing stores.
Overall U.S. retail sales climbed 0.7% in November, the biggest jump in eight months, following a solid gain in October, the Commerce Department said on Thursday. Americans stepped up shopping, shelling out more for cars, gardening supplies, electronics and clothing while also dining out more.

The outlook is by no means ebullient, and the choppy performance of consumers in recent years underscores the challenge. Stein Mart's same-store sales rose 4.8% last month. Mr. Stein said although consumers are buying more, they remain determined to spend carefully. "Splurge is a word we haven't heard in a while," he said.

November's gain boosts the prospects of retailers bracing for a sluggish holiday season after disappointing Black Friday sales in late November.

Niraj Shah, CEO of Wayfair LLC, an online furniture retailer, said his business is feeling a tailwind from cheaper gas. The consumer "has a limited amount of discretionary income," Mr. Shah said. "This should give them some more room to spend."

Back Yard Burgers Inc., a Tennessee-based restaurant chain operator, posted an 18% sales gain during Thanksgiving week compared with a year earlier. Sales have continued to climb steadily in December, said CEO David McDougall.

"More discretionary income is available" because of lower gas prices, Mr. McDougall said. "For the restaurant sector as a whole, I think that bodes well for us." He believes there broader factors are at play: faster job growth, improved consumer confidence and his menu revamp with higher-quality products, including a $7.99 prime rib sandwich.

The average price of a gallon of regular gasoline has fallen by more than a dollar since mid-June. That has freed up billions of dollars collectively for consumers to spend on other goods. Families on average had $42 more to

Sharp drops in fuel prices historically occurred during a weak economy, when consumers are downtrodden. In 2008, prices fell from a peak above $4 a gallon in the summer to near $1.60 by December, government figures show. But retail sales also tumbled.

This time, the U.S. economy is picking up, unemployment is falling and consumers are gaining confidence. "We're through the recession and the oil prices have fallen due to increases in supply-that's a very different situation" than falling demand, said IHS Global Insight economist Chris Christopher.

As a result, lower gasoline prices are giving consumer spending an "upward jolt," he said. "It's at the right time of the year. The fourth quarter is the consumer quarter."

When Wal-Mart Stores Inc. reported in November its first quarterly sales increase since 2012, the chief executive of its U.S. operations, Greg Foran, pointed to falling gasoline prices as a factor.

The National Retail Federation, an industry trade group, said November's gains were consistent with its forecast for a 4.1% rise in retail sales for the holiday season, the strongest gain since 2011.

The trade group spooked investors and some retail executives when it reported an 11% drop in retail sales over the Thanksgiving weekend. Analysts said sales were likely pulled forward when retailers offered holiday deals in early November.

November same-store sales at the handful of retailers who release the figures rose 4.4%, more than the expected 3.4% gain, according to Retail Metrics.

"We see signs that we might gain a bit more tailwind from improved customer sentiment, higher employment, and lower gas prices," Karen Hoguet , Macy's Inc. 's chief financial officer, told analysts last month.

But Ms. Hoguet added Macy's was balancing those benefits against the reality that customers were spending more of their disposable dollars on categories that the retailer doesn't sell, such as cars, health care, electronics and improvements to their homes.

Shelly Singh, a 39-year-old stay-at-home mother who lives in Valley Stream, N.Y., said she plans to use the extra money from lower gas prices to plan a family vacation. "The fact that gas prices are lower will save me money," Ms. Singh said.

QUESTIONS:

1. Why do lower gas prices sometimes signal an economic slowdown?

2. What is causing the current drop in the price of gas?

3. Which retail sectors think they will benefit from the increase in consumer disposable income?

4. Discuss other economic indicators that might be important signals for the retail sector.

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Microeconomics: What is causing the current drop in the price of gas
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