Consumers Paying More for Gas Than Cars?

What happens when unexpected expenses hit your budget? Unless you want to go in debt, you have to cut back somewhere else.

Case in point: Rising gas prices have forced debt-burdened consumers into a corner. The weekly fill-up at the pump has jumped substantially in the past couple of years. According to official reports, consumers are paying +41% more for gasoline this year than they were in 2006. With the house ATM (aka, home equity loans) running low on funds, consumers are forced to borrow from other places to finance daily trips down the highway. ‘Rob Peter to pay Paul’ has become a way of life for the American consumer.

That’s why it’s not surprising this came out today. Bloomberg reported for the first time since 1982, consumers spent more for gasoline than for new cars. In June, gasoline accounted for 4.4% of consumer spending versus 3.9% for automobiles and motor parts. This is a startling find, although not completely unexpected.

Even though gas has been trending down over the past few weeks, the broad economic effects have been felt in other areas. It has hit consumer discretionary especially hard, where automakers reside. In the past 52-weeks, that sector has fallen -11.7%, where the S&P 500 is only down -7.5%. The immediate results can be seen in high-profile bankruptcies: Sharper Image, Linens & Things, Mervyn’s, etc. Now we see the effect in automakers. People don’t want to buy new cars when they can’t afford the gas they put in their old cars. It’s simple economics.

The bigger question is how long this will last. Trends are pointing against discretionary at the moment, but trends can change. Six weeks ago, trends pointed towards energy and materials — My what a difference a month can make. This week, we’re staring at a +0.5% rise. Next week we could be down half-a-percent. Momentum shifts daily as the market decides what to do. That’s what makes this business interesting…and yes, sometimes painful. At least falling gas prices are lessening the sting of a volatile market. Let’s hope this trend continues.

Have a great weekend.