The following two charts (and the comments in between them) are part of
a very interesting article by James Hamilton. The collapse in oil prices last fall acted as a key economic stabilizer and helped ameliorate the economic decline.
It showed up in two key places. The first was in the trade deficit numbers, which have shown a very dramatic improvement over the last year (see
here and
here). The other place it showed up was in retail sales, since a dollar spent at the gas pump is a dollar that can not be spent elsewhere.
Since last Christmas, prices at the pump have climbed sharply, as shown in the first graph. While prices are still far below the levels of a year ago, the current levels are high enough to start hurting, especially those who have seen their incomes drop due to the recession. Dr. Hamilton calculates that the current prices would be consistent with energy taking up over 6% of total personal consumption expenditures, up from 4.85% back in December.
As the second graph shows, that would be about the share of spending energy had back in the mid-1980’s. The mid-1980’s were not exactly the worst period of our economic history, so such a level in and of itself should not be a real problem for the economy. And we faced a far more serious problem with energy prices in the 1970’s than we did even at the worst energy price levels we saw a year ago.
Still, this is coming at a time when the economy is still very fragile. Retail spending on goods other than energy face strong headwinds from both the need for consumers to rebuild their personal balance sheets (pay down past debts and build up savings) and from much worse personal income statements (unemployment, hours and wages cut, lower interest rates on savings). This is just one more unhelpful factor that will pressure sales, particularly for stores that sell discretionary items, including clothing stores like
The Gap (GPS) and appliance stores like
Rex Stores (RSC) and
HH Gregg (HGG). Higher oil prices are of course good news for the energy sector, but for the overall economy high energy prices are a significant negative.
The rise in oil prices does not seem to be consistent with the overall weakness of the world economy, but there are several reasons why it just may be sustained or extended, even in the absence of a global economic rebound.
