- by New Deal democrat
As readers know well, one of my favorite “real life” indicators is real aggregate nonsupervisory payrolls, which measures how much in wages average American workers have to spend each month. When it is growing, economic expansions almost always continue; when it declines by any significant amount, recessions almost always ensue shortly.
With gas prices going from $3 to $4 a gallon in March, how is it likely to be impacted? Let’s take a look at a current estimate as well as some history.
Although I’ve done my own K.I.S.S. estimate, the folks at the Cleveland Fed take a much more detailed approach, and publish nowcasts monthly. As of last Friday, they were estimating that March headline CPI would increase 0.8%:
Although Friday is a religious holiday, and markets will be closed, the jobs report for March is scheduled to be released as usual. Although we obviously don’t have the actual figure yet, what we can say is that for the last three years, nominally aggregate payrolls have increased an average of a little under 0.4%; for the year 2025, it slowed to 0.3%:
In other words, if payrolls increased in March by the same percent they have averaged over the past year, real aggregate payrolls are likely to decline about -0.5%. As the below graph, which norms real aggregate payrolls to their peak in January, shows, that would take us back down to just above August and September levels, since February already saw a decline of -0.2%:
Per my previous analysis, that wouldn’t necessarily be enough to flag recession on its own, but it would be in the ballpark of the average such decline until the onset of recessions — and remember that the shelter kludge of CPI during fall’s shutdown suggests that CPI should have been about 0.2% higher, meaning that in *real* real terms average Americans might have a little less to spend than they did last summer.
Is that supported by the historical data? Well, let’s take a look at what has happened to real aggregate nonsupervisory payrolls in past oil shocks. Note that because the official gas price data didn’t begin until late 1991, I’m using spot oil prices for West Texas crude oil (/10 for scale) in the below graphs.
In the 1974 oil embargo, in January oil prices increased 125% from $4 to $10 a barrel (blue). Real payrolls (red) declined -1.1%:
In the second OPEC oil shock of 1979, in August oil prices increased 21.8% from $21.80/barrel to $26.50. Real payrolls declined -0.3%:
OPEC’s pricing power collapsed in 1986, but with Iraq’s invasion of Kuwait in August 1990, oil prices increased 45.8% from $18.60/barrel to $27.20. Real payrolls declined -0.5%:
The final graph below covers 3 separate events. Gas prices bottomed at the end of 1998. In March 1999, oil prices rose 22.1% from $12/gallon to $14.70. Although not shown, gas prices rose 19.3% from $0.90/gallon to $1.08. Real aggregate payrolls declined -0.3%.
When Katrina hit at the end of August 2005, over the two month period till the end of September, oil prices increased 10.7% from $58.70/barrel to $65,00. Gas prices rose from $2.29/gallon to $2.80. Real aggregate payrolls declined -0.3% in August and another -0.8% in September.
Finally, oil prices rose in March 2009 from their Great Recession bottom by 22.5% from $39.20/barrel to $48.00. Gas prices rose 7.2% from $1.91/gallon to $2.44 by the end of April. Real aggregate payrolls declined -0.9%:
This month oil prices started out at about $64.50/barrel. They are likely to end the month at about $100, a 55% increase. Gas prices are likely to be higher by about 35%. This is about equivalent to the Kuwait invasion oil shock, and second only to the 1974 embargo. In the former, real aggregate payrolls declined -0.5%, and in the latter -1.1%. So the estimation of -0.5% in real aggregate payrolls based on the Cleveland Fed’s nowcast for March headline inflation appears likely, and if anything somewhat conservative.