The link between US consumer spending and oil prices isn’t concrete, tending to evolve over the last 20 years, according to a study done and published by the Federal Reserve Bank of Kansas City.
There are two main channels through which oil price changes affect consumer spending, the bank said. The overall effect of these two channels is determined by the degree to which a country relies on oil imports to meet its energy needs.
TWO CHANNELS OF SPENDING EFFECTS
Through the first channel, the discretionary-income channel changes in oil (specifically, gasoline) prices directly affect consumer spending on other goods and services as discretionary income changes.
Through the second channel, the oil-producer channel, oil price changes indirectly affect consumption through their effects on oil sector revenues and the costs associated with reallocating labor and capital from the oil sector to other sectors of the economy, the bank said.
Historically, consumers have tended to increase spending on non-oil goods and services when oil prices decline and cut back on such spending when oil prices rise, the bank said. This response, in part, is because the US is a major oil importer and the demand for oil is relatively price-inelastic, or slow to adjust to price changes.
However, that relationship may have changed, the study said. The domestic oil sector has grown strongly in the last decade, increasing its importance to overall US economic activity, rendering the US less reliant on oil imports.
In addition, oil expenditures have fallen as a share of household budgets, the economists said. As a result, oil price swings may no longer have the same effect on household consumption as they did in the past.
Consumers can benefit from lower oil prices that pass through to lower gasoline prices by redirecting their spending on gasoline toward non-energy-related items, the bank said.
Oil-price changes also may affect consumption indirectly: the oil producer channel, the bank said. This channel operates in the opposite direction of the discretionary income channel in that it implies that a contraction in the oil sector resulting from lower revenues may result in lower consumer spending.
Energy-sector employees may not be able to translate their specialized skills for use in other sectors should low oil prices lead to layoffs, which, could reduce consumption, the bank said. In this way, frictions in the reallocation of sector-specific labor (or capital) can affect consumption beyond the direct effect of oil price changes.
CATTLE, BEEF RECAP
Fed cattle traded last week at $120 to $126 per cwt on a live basis, steady to up $1 from the previous week. Dressed-basis trading was at $193 to $196 per cwt, steady to down $2.
The USDA choice cutout Tuesday was up $2.09 per cwt at $278.26, while select was up $1.34 at $270.47. The choice/select spread widened to $7.79 from $7.04 with 62 loads of fabricated product and 29 loads of trimmings and grinds sold into the spot market.
The USDA reported Tuesday that basis bids for corn from livestock feeding operations in the Southern Plains were unchanged at $1.05 to $1.16 a bushel over the May CBOT futures contract, which settled at $6.06 1/2 a bushel, up $0.14 1/2.
There were no delivery intentions posted against the Apr live cattle futures contract Tuesday. None were retendered, and none were demanded or reclaimed.
The CME Feeder Cattle Index for the seven days ended Monday was $138.48 per cwt down $1.65. This compares with Tuesday’s Apr contract settlement of $137.57 per cwt, down $0.15.