- by New Deal democrat
There is no important economic data being released today, and nothing in the past several weeks has changed my overall economic outlook: to wit, the meme of a “K-shaped” economy is accurate. The top 10%-20% are doing extremely well, and the “wealth effect” of large stock market gains in 2025 driven by AI-related spending, particularly for data center construction is driving their consumption; while the bottom 80% or so are just barely holding their heads above water. The large majority of important coincident data about income, spending, jobs, and sales bears this out.
Meanwhile, needless to say over the past few days there has been a major geopolitical development: it is fair to say that the US is at war with Iran. I don’t have any particular insight into that development, beyond the sense I have had since the 2024 election that T—-p got very lucky in inheriting an economy on the rise in 2017, and he didn’t have a sense of what levers to pull to be able to affect it that much. But he was not so lucky this time, and now he knows where the levers are; and one thing we know about T—-p is that once he finds a lever that works, he keeps pulling it over and over again. That is also on display militarily: as far as he was concerned, pulling the lever of using the military to decapitate a regime worked very well in Venezuela, so let’s do it again! (Rumors are, Cuba is now next on the list).
But one thing I do have some insight into, is the affect of the price of gas on the US economy. So today, let’s take a look at how that is playing out so far, and what to look for in the immediate future.
To begin with, almost all US recessions in the past 50 years have had a component of an “oil shock.” This has a stagflationary effect: driving up prices, and constricting the ability to spend on other things. Typically that stagflationary effect has kicked it at about a 40% increase in price YoY. While I won’t bother with the oil price chart going all the way back to the 1970s, here is what YoY gas prices have looked like this Millennium:
Most significantly, there was an oil price shock in the 2000s that played a role in the Great Recession, and also operated as a “choke collar” on growth during the first five years afterward.
But it isn’t just the increase per se; rather, as I wrote a few weeks ago, it is a function of how much that price increase hits consumers’ wallets. A 40% increase from a very low price is different from a 40% increase from a price that already was slightly constrictive. To show that, let me update the graph I ran then, of gas prices divided by average hourly wages on nonsupervisory peronnel, showing in effect how long a wage earner has to work to buy a gallon of gas:
As you can see, with the last dip in prices during the winter, gas prices were particularly cheap compared with wages; indeed among the lowest such comparisons since the 1990s.
Now let’s take a look at gas and oil prices since the pandemic, right up until this moment.
Let me start with a graph of gas prices for the past three years:
As you can see, there is a seasonal rhythm to these prices, as refiners change from winter to summer blends and back again. Prices tend to bottom at the end of each year, and rise towards midyear.
Further, since Europe and the US worked around the Russian invasion of Ukraine in 2022, gas prices have generally declined YoY:
But now let’s zoom in on the past 12 months:
With gas prices at the pump rising from $2.94/gallon last week to $3.08 as of this morning, gas is at this moment the same price was it was exactly one year ago.
And because global oil prices lead gas prices at the pump (with the caveat that they go up like a rocket and come down like a feather), here’s a look at global oil prices for the past year updated through this morning:
Oil prices were already rising from a multi-year low of $55/barrel during the Holiday season to $67 as of last Friday, as traders were already nervous about the US naval buildup around the Middle East. Then, on Monday, prices immediately rose to $71 and as of this morning to over $76.
That’s a 38% increase since their lows. Of course, I have no insight as to where oil prices will go next month, next week, or even later today, but if that increase holds, it implies an increase in gas prices from their low of roughly $2.80/gallon to about $3.85/gallon. A 40%+ increase would coincide with roughly gas prices at the pump of $4/gallon.
That kind of increase in gas prices at the pump would definitely concentrate consumers’ minds. But even that, in terms of comparisons with wages, would only take us back to 2006 or early 2023 levels. To create a recessionary “oil shock,” all things being equal we would probably need to see prices of $4.50/gallon or above. To bring things full circle, however, in our present “K-shaped” economy, with most households already just keeping their heads above water, I doubt we need to get that far. I strongly suspect that if the US war with Iran causes gas prices to go to $4/gallon, that by itself in the current situation would be enough to bring about a recession tout suite.
