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Surging Gas Prices Can Stall the Recovery

If pump prices hit $5 a gallon nationwide, all bets are off


The Dow Jones industrial average briefly touched 13,000 Tuesday as investors cheered news of the second bailout of Greece. Unfortunately, the celebration may have been premature, if forecasts that gas nationwide will hit $4, or even $5, a gallon this summer come true. The $4 threshold has already been breached in California.

For now, the threat of rising gas prices doesn’t appear to be worrying most investors. The S&P 500 index has been on a roll so far this year, gaining 8.3% as people become more confident that the U.S. recovery looks sustainable. Nonetheless, worries about America’s economic future remain.

Wal-Mart Stores (NYSE:WMT) posted its second disappointing earnings report in a row on Tuesday. The world’s largest retailer was hurt in the fourth quarter by the deep discounts it offered to lure shoppers into its stores during the holiday season. Pressure on margins will continue for the foreseeable future.

“We may see margins come down more than expenses in some quarters, and expenses come down more than margins in other quarters,” CFO Charles Holley told reporters. “We’re not going to match expense reduction with margin reduction.”

Macy’s (NYSE:M) and Saks (NYSE:SKS), retailers that cater to high-end consumers, today both reported double-digit earnings growth this quarter, as wealthy consumers are becoming less concerned about their financial futures.

But even the wealthy will have to recalibrate some spending if gas hits $5, because for every $1 a gallon price increase at the pumps, $20 million comes out of the pockets of businesses, said William Dunkelberg, chief economist for the National Federation of Independent Business in an interview with The Christian Science Monitor. “It drains consumer spending when it’s already weak,” said Dunkelberg, “and that’s not helpful for hiring.”

Indeed, it’s not helpful for many things. Most gasoline engines in use today are far more efficient than just a few years ago. Yet, they’re not designed with $5 gas in mind. Higher gas prices could depress auto sales just as the Big 3 were starting to regain their financial footing. Chrysler Group, the smallest and financially weakest of Detroit’s carmakers, would likely be hit the hardest.

Airlines also would suffer as fuel becomes ever-more expensive. And as transport companies levy fuel surcharges to recover their rising costs, it’ll only further enrage consumers who already hate such fees. At this stage of the country’s fragile recovery, these hits are the last thing it needs.

One reason for the spike in gasoline prices are worries about a possible Israeli missile strike against Iran over its assumed nuclear weapons developments. Tehran recently cut off oil shipments to the U.K. and France to protest their decision to impose tougher sanctions on the regime. Even though Iran oil doesn’t make its way to the U.S., with oil being a global market, any supply curtailments or demand increases affect prices everywhere.

Consumer confidence took an unexpected dip in January, reversing gains in the prior two months. Not coincidentally, gas prices have surged 29 cents per gallon since December, according to the U.S. Energy Information Administration. That increase came well before the start of the summer driving season when prices go generally go up as demand increases.

Gas prices are the economic equivalent to ants at a picnic: They spoil everyone’s day. Investors beware.

Article printed from InvestorPlace Media,

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