Falling Gas Prices May Boost Consumer Spending, Retail Stocks

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Falling Oil Prices May Spell Relief For Consumers

• Summary: With increasing consumer concern surrounding the housing market, the drop in oil prices is often overlooked. Robert Mellman, senior economist at J.P. Morgan Chase thinks gasoline prices will soon fall to $2.30 a gallon, potentially boosting consumer spending and impacting Q4 economic growth. Still, he says, "Some 99% of the questions I get these days are about the size of the drag from housing, and I think that far too few people are thinking seriously about the boost from lower oil". The decline in oil prices is predicted to positively impact retailers across the value chain from Wal-Mart (WMT) to Williams-Sonoma (WSM). Equally important is the potential effect on inflation: according to Goldman Sachs economist Edward McKelvey, decreasing gasoline prices will take 0.4 percentage points off the overall inflation rate; he believes that "by boosting growth, lower energy prices could also make rate cuts less likely."

• Comment on related stocks/ETFs: If lower gas prices raise consumer spending in the second half, the retailers' boost could be captured by going long the retail ETF -- Retail HOLDRS (RTH), which has already enjoyed a bump in the past month. Currency trader David Andrew Taylor comments on the downside to cheaper oil.