Gauging Consumer Spending At Present

As gasoline prices have been (generally) rising, we can use generalizations from microeconomic theory to create some macroeconomic predictions.

In the short-term, the demand for gasoline tends to be price inelastic (see: http://www.uri.edu/artsci/ecn/lardaro/lectures/Elasticity_of_Demand.pdf ). As a result, when gas price rises, total spending on gasoline tends to increase (other things being equal). Given income in the short-term, this means more of total income will be devoted to gasoline and less will be available for other purposes (of course the level of income must be considered as well). As a result, income available for discretionary purchases can be expected to fall, lowering discretionary spending.

This microeconomic effect has the potential to slow the rate of economic growth, causing a decrease in discretionary spending and a rise in non-discretionary spending. NOTE: this is a TESTABLE HYPOTHESIS, not a statistical certainty. Also, the magnitude of the change in not necessarily large. We can gauge the actual impact by examining two ETF': Consumer Staples (XLP) and Consumer Discretionary (XLY). More about these in the next few postings.