Analysis: Can U.S. economy withstand gasoline price curse?

WASHINGTON Thu Feb 23, 2012 8:12am EST

Drivers wait in line to refill their tanks at a Costco store in Van Nuys, California February 21, 2012.   REUTERS/Gene Blevins

Drivers wait in line to refill their tanks at a Costco store in Van Nuys, California February 21, 2012.

Credit: Reuters/Gene Blevins

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WASHINGTON (Reuters) - Could history repeat itself? That is a question uppermost in the minds of many Americans as they warily watch gasoline prices at the pump rise week after week.

After all, a spike in gasoline prices early last year helped nearly knock the economy back into recession.

The answer, economists say, is that this time is different: the recovery is in far better shape to absorb the blow.

"This is the dark cloud in an otherwise brightening domestic economic picture. It's something we need to watch right now, but not panic about yet," said Jerry Webman, chief economist at OppenheimerFunds in New York.

U.S. gas prices have jumped 8.8 percent since the start of this year, according to the Energy Information Agency, topping an average of $3.65 a gallon in the week through Monday. This is a record for this time of the year when prices are usually on the low side because of slow seasonal demand.

Early last year, a combination of strong gasoline prices in the wake of the so-called Arab spring uprisings and disruptions to motor vehicle production after a devastating earthquake in Japan put the brakes on U.S. growth.

Although gasoline prices are 41 cents higher than they were at this time last year, there are no supply-chain problems disrupting factory production and winter this year has been unseasonably warm, giving the economy a mild stimulus.

"Fortunately the U.S. economy is on an upswing, not strong but on the way up. It's in a better shape to deal with the oil prices," said Sung Won Sohn, an economics professor at California State University Channel Island. "We don't have the Japanese tsunami to worry about, business and consumer confidence have improved, and the job market is growing nicely."


Recent data ranging from employment to manufacturing have been solid, leading economists to temper their expectations of a sharp slowdown in U.S. economic growth in the current quarter.

The brightening outlook has helped support oil prices, although the main driver appears to be fear that a confrontation between Western nations and Iran could end up disrupting oil supplies. U.S. crude prices hit a more than nine-month high at $106.72 a barrel during trading on Wednesday.

Iran, the world's fifth-largest oil exporter, has threatened to close the Strait of Hormuz, the main Gulf oil shipping lane, in response to sanctions aimed at getting Tehran to abandon its nuclear program. Western nations say the program is aimed at developing weapons; Tehran says it's peaceful.

Although U.S. gasoline prices have jumped, economists take comfort in the fact that the pace of the increase has not been as rapid as it was in 2011. Gasoline prices peaked at about $4.02 a gallon in May last year, not far from the all-time high of $4.16 a gallon reached in July 2008.

The rise in gasoline prices poses a threat to both inflation and growth. It acts as a tax on households, which are already strained by weak income growth, and will likely pull spending away from non-energy goods and services.

So far, the pinch has been tempered by falling prices for natural gas. Natural gas prices dropped 2.9 percent in January, their fourth straight monthly decline.

"Roughly one-third of the gasoline spike has been offset by lower natural gas prices," said Joseph LaVorgna, chief economist at Deutsche Bank in New York. Other economists say the impact could be even greater.

Still, a sustained increase could complicate the task of the Federal Reserve. Officials who may want to come to the economy's aid with more stimulus could think twice if there is upward inflation pressure.

"If we get caught in an environment of steadily rising gasoline prices, that will put them in a bind," said Anthony Karydakis, chief economist at Commerzbank in New York.

"On the one hand they will be looking at the risk of a cool down in the economy again and on the other they will be looking at the risk of rising prices."


Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina, said even at $4 a gallon, gasoline would not push the economy into recession on its own, although it would eat up the benefit of the recent extension of the payroll tax cut, which is expected to provide $1,000 in relief to the average family this year.

"If that is the only thing to happen I don't think that will turn us back into recession," he said.

Last year when prices breached the $4 a gallon mark, they stayed there for only three weeks. Economists argue that if they were to rise that high this year, households would likely view the increase as temporary and dip into savings to fund purchases.

A strengthening in the labor market, which has enjoyed two straight months of solid job gains, is also seen helping to support spending.

But higher gas prices do present a fresh headwind that increases the economy's vulnerability to other shocks.

"Remember a car that's going at 20 miles a hour is easier to stop than a car that is going 60 miles an hour, and the U.S. economy is going at 20 miles. That makes us a bit vulnerable to a pause," said OppenheimerFunds' Webman.

(Reporting By Lucia Mutikani; Editing by Leslie Adler)

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Comments (26)
Islander2010 wrote:
Take this challenge of higher gas prices to start migrating to electric battery technology. Diversify to natural gas, solar power, geothermal energy and wind turbine generation. Also start approvals for more thorium-fueled nuclear plants and for the short term – drill, baby, drill in the United States!

Feb 23, 2012 1:06am EST  --  Report as abuse
ExRepublican2 wrote:
The rising GAS prices do not effect the wealthy, it effects the working class and those who are seeking employment daily commuting to job interviews. There is no reason for gas or home heating oil to rise, since we in the Northeast are experiencing a mild winter, therefore supply should be up not down. But hey, our congress men and women (Republican Majority) are not powerful enough to enforce fair market price (Corp Taxes) on BIG Oil.

Feb 23, 2012 1:13am EST  --  Report as abuse
jk1285 wrote:
Are these the same “experts” who failed to realize how bad the economy was in 2008? The economic “experts” don’t really have a good track record. So why should this be any different? It’s not like the economy is “roaring back.” It’s not even a “weak comeback.” Our economy is on life-support. 5 dollar a gallon gasoline will plunge us back into recession.

Feb 23, 2012 1:26am EST  --  Report as abuse
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