- 2011年4月4日

Will Rising Gas Prices Threaten Recent Gains in U.S. E-Commerce Spending?

Much has been made of late about rising gas prices, with recent national averages surging from about $3.00 per gallon to $3.60 per gallon in just the past 3 or 4 months. Price at the pump has always been a particular sensitivity for the American consumer because it’s a price many pay every week or two that can account for a significant portion of people’s discretionary spending.

We have seen evidence in recent years of the negative impact rising gas prices appear to have on e-commerce spending, which is mostly discretionary in nature. If we look at year-over-year retail e-commerce spending growth rates, we can see that the exceptionally strong growth we had been seeing up until mid-2007 began to drop off considerably over the next year, coinciding with a run-up in retail gas prices from about $3.00 per gallon to over $4.00 per gallon.

With the worst of the economic downturn seemingly behind us (although the unemployment rate remains stubbornly high), we have begun to see a consistently improving outlook for the retail e-commerce sector with growth rates back into the double-digits and sustained over the past four months. However, with gas prices similarly on the rise, there is a legitimate question as to whether these growth rates will continue.

How Do Gas Prices Correspond to E-Commerce Growth Rates?
There has been debate over the years about the effect of rising gas prices on e-commerce spending. One theory says that as gas prices rise, consumers will be more likely to forgo car trips to the mall and opt instead to shop online. While this effect might exist to some small degree, the more prevalent effect of rising gas prices is the constraint on total discretionary spending. Put another way, the $30 or $40 a month more the average American is spending on gas plays a much larger role in their retail spending habits than the fact that they can save a dollar or two in gas by forgoing a trip to the mall.

To get a better understanding of just how important gas prices might be in determining the levels of retail e-commerce spending, I wanted to see how much of a correlation existed between those two variables. I began my analysis by running a scatter plot of Retail Gas Prices vs. E-Commerce Spending Growth Rates (for the months of January 2005 through February 2011) expecting to see a visible inverse relationship between the variables. In other words, when gas prices went up, I expected to see growth rates decline. The data instead showed that the correlation overall was very low(r-squared = 0.0083), meaning there was no immediately apparent relationship between the variables. What could explain this?

On examining the graph, I realized that many of the data points that seemed to influence the regression were the ones on the lower left hand side – when low gas prices coincided with low and negative e-commerce growth rates. These data points all occurred during the recent recession when consumer demand plummeted, bringing both consumer spending and gas prices down with it. It became clear that other variables beyond gas prices would need to be considered in this analysis to help isolate the effect of gas prices on e-commerce.

So I introduced a couple of new variables into the analysis to help account for the effects of the recession: Unemployment Rate and S&P 500 Index. Unemployment Rate would help account for the most tangible and immediate effects of a recession, while the S&P 500 Index would provide a reasonable approximation for household wealth and its effect on consumer willingness to spend.

Regression Results
I conducted the regression using monthly data from January 2005 through February 2011 with (Y) U.S. E-Commerce Growth Rates as the dependent variable and (A) U.S. Unemployment Rate, (B) S&P 500 Index and (C) U.S. Retail Gas Prices as the independent variables. Below is a sample of the data used in the analysis:

The results of the regression, which generated a reasonably strong r-squared value of .64, provided the following model for prediction:

Y = 0.05522 - 0.01881*A + 0.00032*B - 0.06351*C

This regression indicates, as one might expect, that there is a positive relationship between the S&P 500 Index and E-Commerce Growth Rate, and an inverse relationship between Unemployment Rate and E-Commerce Growth Rate.

But most important – and the reason for conducting this investigation in the first place – is that it clearly illustrates the strong inverse relationship between Gas Prices and E-Commerce Growth Rate. For every 10 cents gas prices rise, one would expect e-commerce growth rates to decline about 0.6 percentage points.

Putting these findings into the context of the current economic environment, with February 2011 data showing a U.S. unemployment rate of 8.9, a closing S&P Index of 1327, and U.S. Retail Gas Prices of $3.21, our model predicts an E-Commerce Growth Rate of the following:

Y = 0.05522 - 0.01881(8.9) + 0.00032(1327) - 0.06351($3.21) = 10.7%

The prediction of 10.7% is not too far off from the actual February growth rate of 12.0%. But the point isn’t to have a perfectly predictive model; rather, it is to gain a reasonable understanding of what to expect with e-commerce spending as gas prices rise.

With March now in our rear view mirror, we have seen average gas prices accelerate to around $3.60 per gallon, nearly $0.40 higher than the February average. If we hold the other variables constant and raise the gas price in our model to $3.60, we get a predicted E-Commerce Growth Rate for March of 8.2% – or 2.5 percentage points lower than February. Now, that might be an extreme view, as average monthly gas prices for March will probably be in the ballpark of $3.55. But even with that input into the model, we get a predicted E-Commerce Growth Rate of 8.6%, still more than 2 percentage points lower than February.

Cautious Outlook for Retail E-Commerce?
In summary, I think it’s fair to say that rapidly rising retail gas prices are cause for concern for the retail e-commerce sector. As disposable income shrinks, so too does discretionary spending as manifested in online retail. All other factors being equal, we should anticipate a 2-percentage point decline in e-commerce spending growth rates vs. what we would have otherwise seen. Hopefully this effect is offset slightly by a healthy stock market and a declining unemployment rate in March, but it still means there’s potential to return to single-digit e-commerce growth rates following four consecutive months of healthy double-digit growth rates.

We’ll have a better sense of how these dynamics play out when we release our Q1 2011 online spending figures in a couple weeks. For now, we can only hope that spiking gas prices is a temporary effect of the conflicts in the Middle East. But with summer just around the corner, chances are gas prices will remain high in the near term and may continue to climb even higher. Online retailers must keep a close eye on these factors because they will likely play a significant role in the ongoing health of the retail e-commerce sector.

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