The bottom line from today’s report on retail sales is that consumer spending continues to increase, even after a surge in spending late last year. February retail sales increased 1.0 percent and the increases in retail sales in the previous two months were revised upward. Taken together, the January-February average of retail sales rose 7.7 percent at an annual rate over the fourth quarter. Why are consumers spending more? There are a couple of reasons, with the two most important likely being an improving job market (remember that payroll employment went up 192,000 in February and there was an upward revision of 58,000 to the previous two months) and the two-percentage-point reduction in payroll taxes as a result of the Administration’s Middle Class Tax Relief Act.
Let’s now talk about gas prices and retail sales. The first place to look is at sales at gasoline stations, a category that comprises roughly 10 percent of total retail sales. Remember that retail sales measures dollars spent at stores (a nominal concept), not gallons of gasoline purchased (a real concept). In February, sales at these stores rose 1.4 percent, the eighth consecutive increase. This increase was most likely due to a jump in gasoline prices, which increased about 5 percent in February (on a seasonally adjusted basis). Over the past several months, gasoline prices have moved up rapidly. In December, the average price per gallon was $3.18 and in February it increased to $3.45. The highest gasoline prices occurred in July 2008, when they averaged $3.99 per gallon. Yikes. And so far in March, prices have already advanced a little over 3 percent so far. So the good news here is that the increase in overall retail sales in February didn’t rise just because we had to pay more at the pump.
Demand for gasoline tends to be “inelastic” - that is, the demand for gasoline is not very sensitive to changes in price in the short run. A forceful, visual demonstration of this point is made in Figure 1, which plots gasoline prices, sales at gasoline stores, and real purchases of gasoline. As you can see, the dollars spent at gasoline stations generally move in lock-step with gasoline prices, indicating the amount of gasoline sold doesn’t change much when prices jump (either up or down). That is, the amount of gasoline sold is fairly steady over time despite the fact that gasoline prices are very volatile. Thus, higher prices at the pump translate into higher retail sales at gasoline stations.
Note that while other goods are sold at gasoline stations (like coffee, gum, brightly colored frozen drinks, fuzzy dice, and an increasing selection of food), the vast majority of sales are still gasoline, according to Census data. However, I've personally noticed that the quality of food offerings at gas stations have seriously improved over time. For instance, I went to a gas station in Pennsylvania recently that also had a donut shop. I love the free market.
A second interesting area where gasoline prices affect retail sales is the sales at motor vehicle dealers. Despite the increase in gas prices, motor vehicle sales rose a strong 2.3 percent in February. Based on industry data, unit vehicle sales (the actual number of cars and light trucks sold) reached their highest level in February since August 2009, during the cash-for-clunkers program. Gasoline prices have an interesting impact on consumers' buying behavior with regards to motor vehicles; gasoline prices influence the relative mix of sales of autos (“cars” to most people) versus light trucks (SUVs, pickups). In other words, the higher the change in gasoline prices, the larger the change in the share of autos in total light motor vehicle sales. (See Figure 2) It stands to reason that when gas prices are high, we’re more likely to lean towards getting more fuel efficient modes of transportation. Further, when gas prices are high, we don’t have as much spare income, so we might also lean towards buying motor vehicles that are a bit less expensive, and cars tend to be cheaper than trucks (well, at least the cars that I have bought). 
~Mark Doms, Chief Economist, U.S. Department of Commerce
March 11, 2011
