Friday, February 18, 2011

Gas Prices are beginning to choke off the Recovery

- by New Deal democrat

Yesterday Bonddad asked whether gas prices will choke off the recovery. My view of the industrial production and retail sales reports this week is less sanguine than his. In fact I believe that $90+ Oil is already beginning to choke off the recovery.

Let's begin with retail sales. As you may recall, real retail sales is one of my favorite economic metrics, since it captures a huge swath of the consumer economy on a monthly basis, and has an excellent record as a leading indicator for jobs. In the last two months, real retail sales have completely stalled:

Now let's compare real retail sales with Oil. In the graph below, the price of Oil is subtracted from its $90 inflection point (this is slightly simplified, since with inflation and GDP growth this year it is closer to $94), and the difference is divided by 10 to better visualize the comparison:

Note that Oil prices have a strong correlation with real retail sales lagged by one to three months, and that correlation is holding up now.

Now here is industrial production:

Note that in the last 8 months, the growth in industrial production has slowed noticeably compared with the first 11 months after its recession bottom.

Next, I've added in Oil prices in with the same formula used above:

Note that there is a considerably longer lag. To help you see this point, here is the same data extended back 5 years:

Oil prices appear to have a good correlation with industrial production, lagged by about 6 to 8 months.

My conclusion: Oil prices are already beginning to "bite." Consumers are beginning to retrench their other spending already. All else being equal, I would expect industrial production to continue to trend towards zero over the next half year.

I have been talking about Oil being a choke collar on recovery for close to two years, and needless to say I have been far from alone. Possibly someone in Versailles ought to notice, and try to do something NOW (not something that will help in 20 years)?

Here's a small suggestion: there are plenty of tour buses that aren't being used because of the economic downturn. These buses tend to be very comfortable -- the antithesis of public transportation. How about fast-tracking approvals for bus companies to use these buses for park-and-ride suburban expressway routes? Give me that plus a local jitney service to take riders to and from the bus drop-off point to their nearby offices, and I will give you an extremely pleasant and profitable alternative to suburban expressways jammed during rush hour with inefficient cars.