00:00 Speaker A
The prolonged war in Iran stirring up concerns over consumer spending taking a toll, especially for lower-income Americans. Joho Finance’s Brooke De Palma, joining here to discuss. Brooke, let’s start here. Talking about this rule of thumb you mentioned, a $20 move in oil is like a $150 billion tax on consumer spending.
00:23 Brooke
Yeah, that was in a Raymond James strategist note from earlier this week. And largely what we’re seeing here is this oil tax. This higher gas prices is what is being referred to as an oil tax. We’ve called multiple different strategists across the course of this week who really identified that for every increase that we see in the price of crude, that’s about a 25 cent or every $10 increase to the price of crude, that’s about a 25 cent higher at the gas pump. And so ultimately, this just means that Americans are going out to pay more. That’s going to take away from their discretionary spend, and ultimately, that means bad news for potential consumer facing companies.
01:03 Speaker A
We’re talking about the consumer, right? There’s there’s all kinds of consumers. So which is the consumer most at risk?
01:08 Brooke
Well, of course, when you think about who is already struggling, who’s already had a hard time to keep up and pace up with inflation over the past few years, that’s the low-income consumer. And so this will sort of you know, increase that pressure on low-income consumers. When you think about a note that Bank of America recently came out with, it pointed that we’re already seeing a widening gap. There was a for the first time in 10 years, we saw the widest level between wage growth between low-income and high-income earners. What we’re seeing now in February, high-income earners wages grew by about 4%, whereas low incomes saw their wages grew by only 0.6%. And so think about it, we see higher gas prices, that means more that they’re paying at the pump, and that means less money in their pockets. And so definitely low-income consumers will feel the brunt of this the most.
02:04 Speaker A
What about a potential offset from a tax refund?
02:06 Brooke
Well, that was sort of the hope going into 2026 is that we were going to get larger than expected tax refunds. and that was even something that McDonald’s CFO, I asked about him just a month ago when we had spoken post earnings. I said, spoken to Ian uh Borden, the CFO of McDonald’s. I said, what are you expecting here when it comes to these tax refunds? And he said, any more money that Americans have in their pockets, that certainly would be a boost for McDonald’s. And boy have the tables turned because now, even if they do get these larger than expected tax refunds, that’s immediately going back into how much more they’re paying at the pump. And so ultimately we’re hearing not only from Raymond James, but also from economists at Bloomberg who say that if oil hovers around $83, that would offset all the benefits of that one big beautiful bill act.
03:00 Speaker A
When you’re talking to executives and analysts, um, and maybe they’re reporting earnings and on the conference calls, what are they saying in terms of their expectations of of consumer behavior and spend looking ahead?
03:12 Brooke
Well, something that we mentioned on the show just the other day was like Dollar General for example, they put out this prudent outlook because they expect this uncertainty around consumer behavior, they expect ongoing pressure around consumers. And we’re also hearing that from multiple other executives. You even Autozone uh executives were at a city conference and what they said was this ultimately pulls back discretionary spend for consumers, but they also said on top of that, they could even see people invest in their current car rather than buy a new car. And then JP Morgan had a really interesting note out because what they said was that in an extreme case scenario, you could even see people kind of think, do I want to get one a new car that has a combustible engine or will I actually go back to thinking about that EV. And so this could really change consumer behavior if we maintain these higher oil prices.
04:13 Speaker A
Yeah, with the EV you you know, you don’t you don’t have that federal tax credit anymore either so that’s. That was a huge boost in September. Are there last question, are there companies though as you were doing this reporting that there’s a flip side to the coin that the companies where they’re actually maybe could benefit from all this?
04:35 Brooke
Right. Well, think about what we saw in 2022 when inflation really peaked is we saw these wholesale retailers do really well. Take in mind Costco or BJ’s. Also, what we’ve been reporting all week is that Costco actually sells gas for about 20 cents cheaper. And so will that bring in more foot traffic, then about 50% of those people that go to the pump, that could then go into the store that’s expected. And so ultimately will Costco get a bit of a boost in foot traffic and similar BJ’s, maybe even Walmart, Sam’s Club as well. Also Dollar General was even testing out gas pumps as well. So anyone that has a gas pump, if you’re going there, maybe then you’ll flow into the store and that could be good news for them.
05:22 Speaker A
All right, Brooke, thank you. Appreciate it.