High Gas Prices Could Slow Recovery
Yesterday I blogged about how oil has experienced its most rapid rise in more than a decade in the face of terrible fundamentals (see article: Oil has rallied faster over the past 75 days than it did during the "bubble" last summer). After a one day break, oil's off to the races again today...up over a buck to nearly $70/barrel.
It's somewhat ironic that the fact that people are bidding up the prices of commodities like oil in anticipation of an economic recovery could actually act as a massive headwind that will slow the recovery from this recession down. The NYT had a great article on this subject today (see article: High Gas Prices Could Slow Recovery).
After falling off of a cliff along with oil, gasoline prices have risen for 41 consecutive days to a national average of nearly $2.62/gallon. That's up a dollar per gallon over the course of a very short period of time...and prices at the pump are probably headed higher. The price of gas has risen 62% since December, while the price of oil has more than doubled since then.
Here's what Yale economists Robert Shiller had to say about the recent rise in the price of gas:
"This hits everyone. It has the potential to affect your confidence.” He said that the recent rise in gasoline prices could effectively offset the new $400 to $800 payroll tax cut most employees are receiving this year as part of the Obama administration’s effort to stimulate the economy.
According to the Oil Price Information Service last summer consumers were spending $1.5 billion per day on gas. After the price of gas fell off of a cliff, consumer spending on gas fell to only $600 million/day. That decrease in the cost of gas was very simulative. Unfortunately, consumer spending on gas had risen back to around $1 billion/day again.
I have stayed far away from any consumer discretionary stocks for a long time, much to my detriment during the recent rally, but I strongly believe that the sector has gotten ahead of itself. The consumer savings rate will likely revert to its historical norm of 9% (from 0% not that long ago) and the percentage of GDP that consumer spending accounts for will likely fall from the 70s to the mid-60s at most (again the historical norm).
Baby Boomers are repairing their crushed retirement portfolios and they have passed their peak spending years. This is the largest generation of consumers that the world has ever seen. Growth in the economy is going to be much slower going forward than we have become accustomed to over the past two decades.
Speaking of Robert Shiller, who's most famous for his home price index, mortgage rates have risen nearly a full point from their recent low. Higher mortgage rates will serve as a drag on home values and consumer spending as well.