You would think that with unemployment hovering near nine percent, a weak housing market, and the national debt spiraling upwards, that the U.S. economy would be particularly unprepared for an external shock of any kind.
But in today's New York Times, Jad Mouawad and Nick Bunkley make the case that, compared with 2008, the last time oil prices spiked, "the American economy may be better prepared for higher fuel costs." In the accompanying video, Aaron Task and I — both of whom arrived to work today by train — discuss whether this is the case.
On the one hand, the U.S. will never be truly prepared for an extended period of truly expensive gas. America remains a car-driving mecca in which longstanding residential and commercial arrangements are constructed around cheap gasoline. And with consumers continuing to dig out from under the debt loads amassed during the late credit boom, every penny spent on fuel is one less available to be spent on other necessities.
But some things have changed in the past few years:
- The Times notes that "many drivers, for example, have given up their gas-guzzling sport utility vehicles." Between cash-for-clunkers, continuing sales of hybrids, higher mileage standards, and efforts by all companies to boost the efficiency of all their offerings (including trucks and SUVS), the American car fleet is marginally more fuel efficient today than it was three years ago.
- In a development that is likely to be good for some business owners and investors — and not so good for consumers — industries are passing along costs quickly rather than swallowing the higher costs.
- The massive increase in natural gas supplies in the past few years means power-hungry industrial firms and utilities are somewhat insulated from the rise of oil.
There's another point worth noting that the Times neglects. Spending and investment decisions have a great deal to do with psychology, so the context in which price increases occur matters. Even though the labor market is much worse today than it was in 2007 and 2008, the underlying trend in the economy is stronger.
With an economy expanding at a three percent annual rate and tepid job growth, consumers may be less likely to be knocked out of the box by sharply higher gas prices. Car sales — the largest single retail sector — were impressive in February. The International Council of Shopping Centers reported that last week, sales rose 2.3 percent from the week before, and were up 2.6 percent from the year before.
The upshot. As I've suggested before, given what's going on in the broader economy, $3.50-per-gallon gas, while it will prove enormously painful for many, won't throw the economy for a loop on its own. Should broader indicators take a turn for the worse, or if gas rises to $4.50-per-gallon and stays there for several months, that would plainly be another story.
Still, we can't forget the impact of how more expensive gas makes us feel. Even as the economy grows less energy-intensive, and more people have more non-car options for mobility, the price of gas still occupies an outsized role in consumer psychology. That has a lot to do with muscle memory of older consumers, but also to do with the unique properties of gas as a consumer product. It's something many people purchase weekly or more than once a week.Its price is advertised loudly in public, and it's difficult to get through the day without being exposed to the price a dozen times. And when you buy it, you have to stand there and watch your spending rise as you fill the tank.
All that makes us feel rising prices of gas at a much more visceral level. If we had to watch a meter running every time we filled a glass of water, or took a hot shower, we'd be much more sensitive to the prices of water and electricity.