By Alex Carrick, Reed Construction Data

The last couple of retail sales reports from Statistics Canada have turned down the excitement meter. As international oil prices continue to climb, on account of the military action in Libya, there is a danger the consumer side of the economy will become more unsettled.

Canadian retail sales in January declined 3.0% month to month for the second time in a row, according to Statistics Canada. This is not to say the news was that bad. They still remained higher than before the recession and solidly positive (+3.5%) on a year-over-year basis.

However, the rate of change of household spending in Canada is now falling behind the United States. Year-over-year retail sales south of the border in January were +7.7% and an even stronger +8.2% in February.

Much of the concern about future consumer spending in both countries focuses on the price of gasoline. In January of this year, Canadians were paying 15.7% more for a litre of gasoline than in the same month a year ago. In the U.S., the price climb was 19.2%.

For Canada and the U.S., the price of a barrel of oil is hovering around $100 USD (U.S. dollars) per barrel. This includes a risk premium of about $10 to $15 per barrel. No supply interruptions have actually occurred on this side of the Atlantic.

We should consider ourselves lucky. It’s a different story in Europe, which is where most of Libya’s oil is normally shipped. Italy in particular is dependent on Libyan crude.

Supply interruptions in Libya have moved the price of European benchmark oil – the North Sea Brent Field price – to US$115 per barrel. At the same time, the price of crude doesn’t comprise as high a proportion of the cost of gasoline in Europe, since governments add on more taxes.

Nevertheless, higher gasoline prices are one more reason – on top of re-emerging sovereign debt worries (Portugal) and a generally higher inflation rate (which implies interest rate hikes) – to lower expectations about Europe’s 2011 growth prospects.

In North America, oil prices won’t have to move much higher before their impact becomes more apparent. As gasoline prices rise, consumers alter their spending patterns.

One area where this becomes particularly obvious is motor vehicle purchases. The automotive market accounts for about 17% of total retail sales in the U.S. In Canada, it is a higher 22%.

January passenger car sales in Canada were down 1.0% from December, while “van, truck and bus” sales were +6.6%, seasonally adjusted, according to Statistics Canada.

In the last couple of years, Canadian passenger car sales have had two floors – in December 2008 during the recession and in August 2010 while the rest of the economy was recovering. Car sales currently stand only slightly above last summer’s depressingly low level.

Truck sales, however, have picked up nicely (+40.4%) from their trough level in February 2009. 

The increase in the price of gas is likely to see some shift in demand from the trucks category to cars, although this is clearly not the preference of consumers. It is also likely to see a moderation in overall automotive orders.

Adding to these negatives will be supply shortages in Japanese assembly and parts operations brought on by earthquake and tsunami damage, as well as by electric power outages.

For Canada, domestic auto purchases – as captured in the retail sales figures - are only part of the story. Equally important for vehicle and parts manufacturers are exports to the U.S.

That’s one reason to pay attention to the wholesale shipment numbers published by Statistics Canada, since they do include sales to American customers.

In January, Canadian wholesalers recorded a sixth straight month of sales increases. Within the total, motor vehicle and parts suppliers achieved a 4.9% sales gain in January, month to month.

U.S. fourth quarter real (i.e., inflation-adjusted) Gross Domestic Product (GDP) growth has just been revised upward from +2.8% to +3.1% by the Bureau of Economic Analysis. This was mainly because consumer spending (+4.0% quarter to quarter annualized) increased faster than originally thought.

The consensus view is that household spending will have trouble maintaining such a torrid pace throughout 2011, partly on account of recent increases in the price of oil.

Higher oil prices also have an effect in other areas of the economy. Firms find it hard to pass on cost increases. The prevalence of fuel surcharges becomes more common. This is often most apparent in the airline industry but it can spread across many sectors.

U.S. corporate profits in last year’s fourth quarter increased 18.3% year over year. That raised 2010’s annual profit level to a 29.2% gain versus 2009, one of the biggest jumps ever.

As in other segments of the economy, higher fuel costs will make it harder to maintain such strength. And if corporate profits ease, the willingness of firms to add staff will be blunted.