Jump in gasoline gouges other consumer spending, could cause consumers to lean back

Trend watch

Today is the first day of spring, although spring break season has gotten off to a very strong start. Weekly air passenger counts in the U.S. jumped 5.0% in the past seven days, up nearly 900,00 to 18.5 million. That’s an all-time high for March and 2.0% above a year ago. Likewise, hotel occupancy popped to 65.7%, the highest since late October.

This strength is despite a surge in callouts by TSA airport security officers amidst the ongoing partial government shutdown, which is entering its second month without pay for these officers. At the world’s busiest airport, Hartsfield-Jackson Atlanta International Airport (ATL), the TSA callout rate topped 30% several times during this past week. Other notable increases have occurred in Houston, New Orleans, Austin, and New York’s JFK, pushing the national average above 10% versus a typical level below 2%.

Lastly, we’ll continue to include the personal tax refunds chart (slide 7, available to clients in the full report) through the end of tax filing season. 

Our take

Two weeks ago, we warned that the pain at the pump was coming. U.S. crude oil prices have spiked about 50%, or more than $30 per barrel during March.

While the U.S. is largely insulated from an energy supply shock since more than 90% of our supply is sourced within North America, prices are set globally, which is being impacted by the effective shutdown of the Strait of Hormuz. Still, the determining factor for the U.S. economic drag will be the duration of the conflict and level of crude oil prices.

In the meantime, consumers are feeling the pinch as U.S. fuel prices have quickly reflected the surge in crude oil prices. Month-to-date in March, diesel prices have jumped 37.2%, while the nationwide average for gasoline has increased 31.1%, or 93 cents. That means each fill-up has increased by $8.54 on average or now costs about $42 more per month and would equate to an additional $500 annualized per vehicle.¹ Of course, your mileage may vary.

The jump in gasoline prices will gouge consumer spending from other categories. On a macro level, $4 per gallon gasoline would divert an additional $10 billion per month toward gasoline. While consumers see their own gasoline prices, diesel prices get imbedded into most products by freight costs and indirectly through costlier inputs, such as fertilizers and chemicals. Thus, higher crude oil will most certainly also show up in other goods prices, such as food, as well as increased shipping costs.

Furthermore, $4 is an important psychological level for many Americans and could cause consumers to lean back. In an American Automobile Association (AAA) survey, 59% say they’d change their driving habits once gas prices exceed $4 per gallon. Equally, $5 per gallon diesel will undoubtedly cause businesses to re-think shipping costs, especially for bulkier goods and those that need to travel longer distances.

In the near term, consumers will have a bit of a buffer from the increased fuel cost in the form of larger tax refunds (see slide 7). Thus far, the average tax refund is roughly $350 larger than a year ago. Still, most consumers probably won’t connect the dots between prices at the pump and larger tax refunds. 

Bottom line

We’ve described the U.S. economy as having one foot on the gas—driven by fiscal stimulus—and one foot on the brake, reflecting trade and tariff uncertainty, underwhelming job growth, and now the Iran situation. Against this muddled backdrop, the Federal Reserve is likely to remain in a holding pattern in the near term following last year’s preemptive rate cuts.