Written by Steven Hansen
This past week, one political candidate opined:
We went into a recession in 2008 because of gasoline prices. The bubble burst in housing because people couldn’t pay their mortgages because they were looking at $4 a gallon gasoline.
Readers will note that I rarely take absolute positions on a subject – not only is the supporting evidence seldom clear or straight forward, but also the exact historical dynamic mix is unlikely to duplicate again in the future (making use of historical data to prove a point problematic). A recession caused by higher energy prices is one such subject – it is difficult to prove energy’s exact relationship to the economy.
- Likely: Gasoline and diesel prices are heading higher – seemingly a combination of global oil demand and Iranian uncertainty. Gasoline prices have been trending higher since early 2009. A NYT article this week suggested $5 per gallon gas was possible if the Iranian situation escalates.
- Usually True: An element of an economy which becomes more dear relative to others can be disruptive. Gasoline prices clearly are growing faster than most other economic elements since the end of the 2007-09 recession.
- Likely True: Higher gasoline prices combined with a weak economy is bad news in the short term. Longer term energy saving investments can make higher gasoline prices an economically positive event.
- Sometimes True: Energy cost rises can be the major element causing recessions. Energy likely was the primary cause the recessions of 1973 and 1980, and possibly played a hand in 1981, 1990 and 2007. Whether it played a role in the 2001 recession is arguable. Relatively high energy prices have been associated with recent recessions.
- Analytically True: As shown on the above graphic, the 2012 energy price year-over-year increases are still moderate using the period since 2000 as a reference.
I find the following graph specifically revealing – it ratios energy costs to GDP. As the economy slows due to a recession with energy prices remaining constant, one would expect the energy to GDP ratio to increase (as the divisor GDP shrinks). But when the energy spike occurs in front of a recession, it is likely energy played a significant role in causing the recession. This implies an energy spike was one of the major causes of the 1980 recession, but likely only a contributor after the fact in subsequent recessions.
The major element in the USA economy is consumer spending. When an element in the consumer budget becomes more dear, the first reaction is to use less of an item or substitute (hamburger for steak). When the subject is gas pump prices:
- drive less (hard to do if the majority of driving is commuting to work).
- buy a new set of wheels which uses less fuel (hard to do if you are spending your last penny) – but if one is buying an American built product this is considered economically positive.
- eliminate another budget item, say health insurance.
It remains my position reinforced by personal consumption data released this past week, that the consumer remains hunkered down with income remaining at January 2007 levels – and overall will continue to spend all of its income. The only option for consumers remains the ability to reallocate their spending. Higher gasoline prices will just make the already unhappy consumer more miserable – and therefore good fodder for political campaigns. The chart below documents the reason for consumer discontent.
It is difficult to write a conclusion to this post – as evidence is not clear in establishing what point rising energy prices becomes a clear danger to the economy. The danger does not appear to exist right now – and likely even $5 per gallon gas would only present a headwind (not a stomach punch) to the economy. A recession based on the current economic dynamics would likely be triggered by other causes, with energy playing only a supporting role.
It is sad economics cannot give a straight forward answer to this simple question – it is a one dimensional “science” in a four dimensional world.
Economic News this Week:
The Econintersect economic forecast for March 2012 continues to indicate a growing economy. This index essentially uses non-monetary measures (counting things) to determine economic growth or contraction. Several of this index’s components draw on transport industry movements.
ECRI has called a recession. Their data looks ahead at least 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession start has been revised to hit around mid-year 2012.
This week ECRI’s WLI index value continues to be less bad at -3.0 – a negative value but the best index value since August 2011. This is the seventh week of index value improvement. This index is indicating the economy six months from today will be weaker – but increasingly marginally.
Initial unemployment claims were essentially unchanged at 351,000. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell 5,500 to 354,000. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.
The data released this week which contain economically intuitive components (forward looking) was negative – rail movements. Rail traffic year-over-year contraction reported for the second week in a row is troubling.
Weekly Economic Release Scorecard:
Bankruptcies this Week: None
Failed Banks this Week: