Don't Count the U.S. Consumer Out

Despite higher energy prices, we expect consumers to continue spending and the U.S. economy to grow

By Joseph Lisanti

Traders make money in the stock market by quickly jumping on a trend. Sometimes they jump on the illusion of a trend, as we suspect happened recently.

As the price of a barrel of crude approached $70, traders sold stocks. They were worried that higher energy prices would choke off economic growth by causing a slowdown in consumer spending.

Oil supplies continue to be tight, because demand has been boosted by strong economic growth in both the U.S. and China. We believe that worries about supply disruption, precipitated by refinery outages and a leadership change in Saudi Arabia, have pushed up oil prices.

The worries appear overblown to us, and oil, though pricey, is far from its all-time peak in inflation-adjusted dollars. Crude sold for $39 a barrel in 1981, but that translates into more than $87 a barrel in today's dollars. David Wyss, Standard & Poor's chief economist, believes that oil would have to reach $100 a barrel to tip the U.S. economy into recession.

Higher energy prices have started to seep into the costs paid by manufacturers. The producer price index climbed 1% in July as energy prices surged 4.4%. But it's consumer prices that concern most people. The core CPI, which excludes food and energy, rose only 0.1% in July and was up only 2.1% on an annual basis, indicating that high fuel prices haven't yet materially affected most consumer items.

The more volatile headline CPI, including food and energy, was up 0.5% last month and 3.2% year over year. That annualized CPI figure has some traders worried that consumer spending will take a hit in coming months. We don't expect that to be a major problem. During the 19-year bull market that began in 1982, the average annual CPI change was 3.3%.

We expect oil prices to moderate a bit, which should be reflected in a reduced CPI number. And we would not bet against the American consumer.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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