Make us your home page
Instagram

Will higher gas prices derail the economic recovery?

NEW YORK — The price of gas in the United States has jumped 45 cents since Jan. 1 and is the highest on record for this time of year, an average of $3.73 a gallon. On Wall Street, talk has turned from the European debt crisis to another worry: Will higher gas prices derail the economic recovery?

Not yet, economists say. They argue that the United States is in much better shape than early last year, when a similar surge in fuel prices weighed on economic growth by squeezing household budgets. Americans spent less on clothes, food and everything else.

Rising gas prices hurt less when an economy is improving than when it's slowing down. So economists expect other spending won't be badly hurt, at least for now. If gas breaks its record of $4.11 a gallon, however, all bets are off.

"Can the economy withstand the increase we've seen so far? The answer is yes," says David Kelly, chief market strategist at J.P. Morgan Funds.

The reasons:

Jobs: The country has added 2 million over the past year. Those 2 million people with paychecks will spend them, which helps the economy.

Job security: Unemployment claims, the best measure of layoffs, are at a four-year low. Fewer Americans are worrying about losing their job, so they can take the punch of higher gas prices and move on.

General improvements: A steadier housing market, the Dow Jones Industrial Average's ascent to 13,000 and other signs of an improving economy also help. Add them together and consumer confidence is the highest in a year. More confidence makes people more likely to keep spending on other things even if gas goes up.

"The public will howl as we approach $4 gas, but they will probably continue to increase spending," says Carl Riccadonna, a senior economist at Deutsche Bank.

The key is what impact gas prices have on other spending. All consumer spending isn't equal. A dollar spent on gas has less of an impact on the U.S. economy than a dollar spent in a restaurant or at a baseball game. The U.S. is an oil-importing country, so many of the dollars spent on gas ultimately leave the country.

The rule of thumb among economists is that a 25-cent increase in gas knocks $25 billion to $30 billion off consumer spending in a year and lowers economic growth by 0.2 percentage points, says Carl Riccadonna, senior economist at Deutsche Bank.

"It's really a two-horse race," Riccadonna says. "There's rising energy costs, and then there is households' ability to handle those rising costs."

So far, households appear to be keeping up. Economists think the economy will grow at a 2.2 percent annual rate in the first half of this year, compared with 0.9 percent in the first half of last year.

Some economists believe oil and gas prices are already nearing a danger zone. "We're getting close to a point where we should start worrying," says Thomas Simons, a market economist at Jefferies & Co. "People hate paying for gas. You get no pleasure out of it, unlike food or clothes."

If gas goes to $4.50 a gallon and stays there, it would cost each household about $1,000 more this year than last to buy the same amount of gas.

GDP revised higher

The U.S. economy expanded more than forecast in 2011's fourth quarter as companies rebuilt inventories in anticipation of growing demand. Gross domestic product climbed at a revised 3 percent annual rate, the most since the second quarter of 2010, Commerce Department figures showed Wednesday in Washington. The revision reflected fewer imports and a smaller drop in nonresidential investment.

Bloomberg News

Will higher gas prices derail the economic recovery? 02/29/12 [Last modified: Wednesday, February 29, 2012 10:44pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Associated Press.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. 'Road to Nowhere' is back: Next phase of Suncoast Parkway coming

    Roads

    Despite intense public opposition and dubious traffic projections, the Florida Department of Transportation has announced that construction of the toll road known as "Suncoast 2" is expected to start in early 2018.

    The Suncoast Parkway ends at U.S. 98 just south of Citrus County. For years residents have opposed extending the toll road, a project dubbed the "Suncoast 2" into Citrus County. But state officials recently announced that the Suncoast 2 should start construction in early 2018. [Stephen J. Coddington  |  TIMES]
  2. A sports rout on Wall Street

    Retail

    NEW YORK — Sporting goods retailers can't shake their losing streak.

  3. Grocery chain Aldi hosting hiring event in Brandon Aug. 24

    Retail

    BRANDON — German grocery chain Aldi is holding a hiring event for its Brandon store Aug. 24. It is looking to fill store associate, shift manager and manager trainee positions.

  4. Lightning owner Jeff Vinik backs film company pursuing global blockbusters

    Corporate

    TAMPA — Jeff Vinik's latest investment might be coming to a theater near you.

    Jeff Vinik, Tampa Bay Lightning owner, invested in a new movie company looking to appeal to a global audience. | [Times file photo]
  5. Trigaux: Look to new Inc. 5000 rankings for Tampa Bay's future heavyweights

    Business

    There's a whole lotta fast-growing private companies here in Tampa Bay. Odds are good you have not heard of most of them.

    Yet.

    Kyle Taylor, CEO and founder of The Penny Hoarder, fills a glass for his employees this past Wednesday as the young St. Petersburg personal advice business celebrates its landing at No. 25 on the 2017 Inc. 5000 list of the fastest growing private companies in the country. Taylor, still in his 20s, wins kudos from executive editor Alexis Grant for keeping the firm's culture innovative. The business ranked No. 32 last year. [DIRK SHADD   |   Times]