NEW YORK — Even as oil prices retreated, energy costs are significantly higher than last year, which has retail analysts worried that consumers — especially lower-income shoppers — will pull back on spending.
At the same time, suppliers in the apparel and consumer products sectors could face higher raw materials costs.
After the holiday weekend, Wall Street was clearly fixed on energy prices and any signs of economic duress. As oil reserves entered the market and production went back on-line in the Gulf, the outlook by investors brightened.
Oil futures fell to $66 a barrel. Analysts and economists said fuel prices at the pump would likely drop and stabilize to the $3 per gallon mark. This news, along with a report from the Institute for Supply Management that signaled expanding economic growth in the services sector, sent shares of retail stocks soaring Tuesday. As a result, the S&P Retail Index gained 2.5 percent to 456.60, bringing the index well above pre-Hurricane Katrina trading levels in the 450 range.
But don’t sigh in relief just yet. Natural gas, which is not stockpiled, could leap to $15 per 1,000 cubic feet from around $11.50 per 1,000 cubic feet now, analysts cautioned. And three separate reports warned of the negative impact of higher energy costs on consumer spending as well as on business.
In a global market report from Citigroup Research, equity analyst P.J. Juvekar said the impact on the petrochemicals industry from Hurricane Katrina will be “greater than Ivan’s impact last year.” The petrochemicals sector is a key source of chemicals used in the raw materials of many consumer products.
According to a Standard & Poor’s Ratings Service report, average prices of petrochemicals had declined in recent months. “But they are still elevated following the favorable pricing climate in 2004, when average prices rose 30 to 40 percent, year-to-year, in some product categories,” the report stated. The S&P expects “commodity exposure” from these products to be a growing, ongoing concern.
On Tuesday, Wellman Inc., a manufacturer of polyester products, said “due to the catastrophic events in the U.S. Gulf Coast,” the cost of raw materials has escalated. As a result, Wellman said it is increasing the price of all polyester staple fiber products by 16 cents per pound this week.
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On the retail side of business, higher energy costs could crimp fourth-quarter sales at retailers such as Wal-Mart Stores Inc. In a Tuesday report from Goldman Sachs, the retail equity analyst team reduced its sector coverage view to “Cautious” from “Neutral.”
“Higher gas prices are likely to take a bigger bite of consumer spending at a time when the consumer does not have much cushion,” the analysts said in their report, adding that the greatest impact will occur now through October.
The analysts said retailers can expect reduced store traffic, as “consumers, driving less, continue to economize their shopping trips, and spend less on unplanned incidental and impulse items.”
A separate report on Tuesday from Brean Murray analyst Eric Beder states lower-income shoppers will be hurt the most from higher fuel costs as well as higher home heating costs. “We have already seen lower-income consumers begin to increase their basket size and reduce their trips to economize on fuel costs,” Beder wrote.
In a report by Legg Mason managing director David Schick, the analyst found that gas at $3 per gallon for those earning around $39,000 a year costs about $84 more a month, or about $1,004 per year, than it did in 2004. Gas at $3.50 a gallon costs the average family $1,437 a year, or $118 per month. “It is important to note the spending impact, on a percentage basis, ramps dramatically at the lower end of the income scale,” Schick said.
For example, as the chart illustrates, consumers making $39,000 have higher gas spending-to-income ratios than those households earning $51,000 a year.
Looking at the broader retail market, analysts are expecting consumer spending to rebound. In a report by Customer Growth Partners LLC, Craig Johnson, president, analyzed consumer spending following natural and man-made disasters such as 9/11 and the recent London bombings and discovered that consumers are resilient and that “consumer spending tends to snap back sharply in the months following the incident.”
Johnson agreed that lower-income customers are “disproportionately affected by higher fuel prices,” but noted that gasoline and oil account for “only about 4 percent of household expenditures, versus 6 percent a quarter century ago.”
“American consumers may forget their energy history,” Johnson stated in the report, “but in 1980 they spent more on gasoline and oil than on the cars they fueled up: 5.9 percent versus 5 percent. But from 2000 to 2004, they spent over 5.6 percent of total expenditures on their cars, almost twice the 2.9 percent for fueling them.”
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