Vehicles and Gasoline Prices
Domestic motor vehicle sales dropped again in September, falling 2.8 percent during the month after plunging 21.8 percent in August. GM instigated an "employee discount plan" for all and any buyers in June that was soon copied by Ford and Chrysler in July. Of course, incentives were not equal on all cars and trucks since Detroit tends to offer special incentives on those cars and trucks that are clogging up inventories and they are keener to sell quickly. In this case, incentives were focused on SUVs. GM did well in June and automakers generally did well in July when light trucks were sold at a 9.2 million-unit rate and an 11.3 million-unit rate respectively. By August, as gasoline prices were climbing, consumers were not quite as enticed by these incentives and light truck sales fell to a 7.8 million-unit rate. September sales slid further - to a 7.3 million-unit rate. Auto sales did inch up in September, but didn't make up the sales shortfall caused by the lost truck sales.

The chart below compares gasoline prices (regular gas) to the share of truck sales as a percentage of the total (domestic sales only). Notice that the initial incentive offerings led trucks to a 66.5 percent share of total domestic motor vehicle sales in July - but dropped back to 56.7 percent in September, the lowest share since March 2003! Incidentally, early 2003 marked the beginning of accelerating gas prices. At the end of September, regular gasoline prices reached $2.80. Granted gas prices surpassed the $3 mark earlier in the month due to shortages stemming from Hurricane Katrina. The chart below reveals that moderation in SUVs tends to correspond with acceleration in gasoline prices.

Not all analysts agree that $3 gasoline prices will stop people from driving - but there is no question that they have made consumers think twice about buying gas-guzzlers. While GM, Ford light truck sales fell sharply in September, Chrysler light truck sales fell modestly, while Honda, Nissan and Toyota actually saw increases in light truck sales in September. These latter makes have a better reputation with gas mileage than the traditional American brands. So, given the chance, high enough gasoline prices will indeed cause consumers to try to conserve.

According to an Energy Department report, U.S. gasoline demand has indeed already begun to moderate. In the four weeks ended September 23, gas demand averaged 8.8 million barrels a day, a 2.8 percent drop from the same period last year. While gas demand typically drops off after Labor Day, experts noted that the decline was larger than usual. Many analysts believe that the drop in demand will help reduce gasoline prices in the next few months. Certainly, as refineries come back on line at full capacity, prices will be able to decline. But a good number of refineries are still shut down.

Vehicles and Confidence
Market players like to monitor consumer confidence as a predictor of consumer spending. Over time, we agree that retail sales will increase more when consumers are generally optimistic about their financial conditions than when they are pessimistic. However, monthly changes in consumer sentiment don't always translate into increases or decreases in retail sales. I have often noted that a shift in motor vehicle sales is a better indicator of confidence that consumer sentiment surveys. The chart below depicts domestic motor vehicle sales relative to the University of Michigan's consumer sentiment index. Notice that the two don't move in tandem. For instance, consumer confidence plunged in response to the 9/11 terrorist attacks, but special incentives caused vehicle sales to surge in October 2001. Consumer sentiment was on a high and rising path in late 2003 and early 2004, but vehicle sales were in a tight range. Most recently, consumer sentiment plunged in both August and September - at the same time that vehicle sales fell from their highs. Everyone seems to be attributing the September decline in confidence to Katrina (and Rita) - and to some extent the "CNN effect" indeed played a role in the month's sharp drop. However, confidence is down over the past few months for the same reason that truck sales plunged: gasoline prices are high and taking a toll on consumer budgets.

Bottom Line
It is entirely possible that consumer sentiment will bounce back in October. The question becomes: how much? Gasoline prices today - and fuel oil and natural gas prices in the next month or two - will continue to play a role in depleting cash for discretionary spending. My husband and my son-in-law pointed out to me that they are not seeing fewer cars on the road - the highway remains clogged with traffic. Yes, we don't have a lot of alternatives to driving (although some metropolitan areas do have a good set of options with buses and trains). But consumers can make alternative choices on other goods and services. The more money they must spend on necessary items (energy), the less money they will spend on other retail sales (furniture, electronics, clothing, books and movies).

Economists have generally reduced their forecasts for economic growth between 0.5 and 1.0-percentage points lately. Most economists were looking for 4 percent growth in the next 2 - 3 quarters are now looking at about a 3 percent GDP growth rate. There is no question that some of the fiscal stimulus will offset the dampening effect of higher energy bills. But the soft patch on the consumer front might just be larger than most economists are expecting.

Evelina M. Tainer, Chief Economist, Econoday