Oil and the economy

Date:   8/20/2005 12:43:10 PM ( 19 y ago)

The Oil Effect

Published: August 20, 2005
Just when it was starting to seem as if consumers were really shaking off high energy prices, Wal-Mart announced this week that its profits stumbled in the second quarter, rising at their slowest rate in four years. Forced to choose between their closets and their gasoline tanks, Americans unsurprisingly chose their tanks. Wal-Mart warned that future sales would be curtailed as well, and no wonder: gasoline is now averaging $2.60 a gallon nationwide, nearly a 39 percent increase from last year. At the same time, natural gas prices are up 60 percent to 90 percent around the country, presaging steep home-heating bills in the months ahead on top of high prices at the pump.



With most other prices relatively tame, consumers could weather the energy squeeze if they had a cushion. They don't.

Wage gains for most Americans are barely keeping up with inflation. And according to a recent Commerce Department report, Americans, on average, are now saving nothing each month, so they obviously cannot pay higher energy bills by reducing the amount they save.

That leaves rising home values to cover growing energy costs. According to a recent report by John Makin, a visiting scholar at the American Enterprise Institute in Washington, the housing boom has offset the economic drag of higher oil prices by enabling homeowners to get cash through refinancing or selling at a profit, and by creating a "wealth effect": as their houses appreciate, homeowners feel rich and thus spend freely, even as they neglect to save.

Mr. Makin estimates that a mere leveling off of housing prices would be sufficient to remove the economic boost from real estate. That would slow consumer spending and, with it, the economy.

No one knows when that leveling off will occur. But homes are already becoming increasingly unaffordable, and refinancings are slowing down. There are early signs that banks are beginning to tighten their lending standards. And the Federal Reserve, which has been trying for more than a year to push up mortgage rates, will probably succeed in that endeavor at some point.

The pain that now seems imminent might have been avoided. Conservation could have reduced energy demand and prices, while properly targeted job growth and savings incentives - not tax cuts for the rich - could have built a stronger job recovery, helping to foster higher wages and new savings. Maybe next time around.



 

Popularity:   message viewed 1192 times
URL:   http://www.curezone.org/blogs/fm.asp?i=975941

<< Return to the standard message view