Why American Consumers Suddenly Have More Money to Spend

NEW YORK (TheStreet) -- Declining gasoline prices has put more money in the pockets of U.S. consumers.

Unleaded gasoline futures have fallen close to 20% since the end of June, leading to a rise in consumer spending and sentiment over that period.

The Commerce Department said Friday retail sales increased 0.6% in August, while July sales were revised higher 0.3% as Americans bought automobiles and a range of other goods. 

On the same note, U.S. consumer sentiment rose in September to its highest level in over a year on a better outlook regarding the domestic economy.

The Thomson Reuters/University of Michigan's preliminary September reading on consumer sentiment came in at 84.6, the highest since July 2013, up from 82.5 in the final August reading.

Although economists fear that real wage growth may be holding back consumers, the significant decline in the price of oil creates the perception that more disposable income can be spent on items other than fueling one's car.

The chart below conveys how drastic a fall unleaded gas prices have experienced over the last two months.

As geopolitical conflict between Russia and Ukraine has calmed, dire predictions of violent intervention by western powers in the region have similarly diminished. This led to a strong decline in the price of oil, which has translated into falling U.S. gas prices. The price of gas now trades at its lowest level in 2014.

Consumer spending accounts for close to two-thirds of economic growth, which could lead to a stronger than expected growth reading in the third quarter based on Friday's consumer data.

Courtesy of StockCharts.com

While lower oil prices are great for consumers, they weigh heavily on the share prices of energy companies as profit margins fall alongside prices at the pump.

The chart below shows the divergence of Energy Select Sector SPDR (XLE) and Market Vectors Retail ETF (RTH) over the past two months as oil prices have declined.

The energy sector exchange-traded fund is comprised mostly of Exxon Mobil (XOM) , Chevron (CVX) , Schlumberger (SLB) , ConocoPhillips (COP)  and EOG Resources (EOG) .

The retail ETF gives the most weight to Wal-Mart Stores (WMT) , Amazon.com (AMZN) , Home Depot (HD) , CVS Caremark (CVS)  and Lowe's Companies (LOW) .

If energy prices remain at their current low levels, it could mean a prolonged period of attractive gas prices. This could push consumer sentiment and spending even higher over the coming months, leading to further divergence between the share prices of companies in the retail and energy sector.

XLE Chart
XLE data by YCharts

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @macroinsights

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

If you liked this article you might like

Five-Day Winning Streak in Stocks Expected to Continue

Five-Day Winning Streak in Stocks Expected to Continue

Best of Kass: It's Been a Wild Week

Best of Kass: It's Been a Wild Week

For Oil Prices, We Are in the Middle of a Perfect Storm

For Oil Prices, We Are in the Middle of a Perfect Storm

Breadth Goes Negative

Breadth Goes Negative

Oil Driller Stocks Pop - Trump Opens Almost All U.S. Waters to Offshore Drilling

Oil Driller Stocks Pop - Trump Opens Almost All U.S. Waters to Offshore Drilling