Monday, October 21, 2013

The oil choke collar disengages - and that's good news

. - by New Deal democrat

The oil choke collar -- the dynamic by which an improving economy caused gas prices to rise to the point where they choked back consumer spending on other items, which weakened the economy, which in turn caused gas prices to decline -- in other words the mechanism that acted as a governor restricting growth -- has disengaged in the last few months. Gas prices are now 13% lower than they were a year ago, and even lower than they were two years ago at this time!

That kind of price decline has only happened 5 times in the last 20 years. The graph below shows this by measuring the YoY percentage change in gas prices and adds 13 so that a 13% decline shows as zero (blue line):

Photobucket Pictures, Images and Photos

In each time this has happened it has been a good sign for growth, either immediately, or at least in several quarters (real GDP YoY growth shown in red). In fact I believe the decline in the price of gas from $4.25 a gallon to $1.50 a gallon in the second half of 2008 is one of the big reasons that the great recession bottomed out in midyear 2009.

One of the things I've been pointing out in my Weekly Indicators column for months now is that, left to its own devices, the economy looks like it wants to grow more in the near future. The disengagement of the oil choke collar is a potent piece of evidence in support of that thesis.