Business

Gas prices threaten recovery

Continued hikes may dampen consumer spending, confidence

WASHINGTON – Inflation remains tame throughout the U.S. economy, with one big exception: gas prices.

Those higher prices haven’t derailed a steadily improving economy. But if they surpass $4 or $5 a gallon, experts fear Americans could pull back on spending, and job growth could stall, posing a potentially serious threat to the recovery.

A few weeks ago, economists generally agreed that the economy was in little danger from higher gas prices as long as job growth remained strong. But fears are now mounting that gas prices could begin to weaken consumer confidence.

The average pump price nationwide is $3.83 a gallon. Energy analysts say it’s bound to climb higher in the weeks ahead.

“It’s a thorn in the side of the consumer and businesses,” said Chris Christopher, an economist at IHS Global Insight. The economy this year “would have been better and stronger if we didn’t have to deal with this.”

So far, higher prices aren’t undermining the economic recovery, which is getting a lift from strong job creation. It would take a big jump – to around $5 a gallon – before most economists would worry that growth would halt and the economy would slide into another recession.

That’s because an improving economy is somewhat insulated from any threat posed by higher prices at the pump.

Even if prices ease after the summer driving season, don’t expect gasoline to fall below $3 a gallon. The government estimates that this year’s average will be $3.79, followed by $3.72 in 2013.

Most economists accept a rough guideline that a 25-cent rise in gas prices knocks about two-tenths of a percentage point off economic growth.

Gas prices also have an outsize impact on consumer confidence, Christopher noted. It’s a high-frequency purchase. Consumers notice the price whether they’re filling up or driving past a gas station.

Along with the unemployment rate and stock market levels, gasoline prices heavily determine how Americans see their financial health.

That effect was evident Friday when a decline was reported in the Thomson Reuters/University of Michigan index of consumer sentiment. The result surprised some economists who had assumed that higher stock prices and lower unemployment would lift consumer sentiment.

The Michigan report showed that “gasoline worries … are outweighing stock market gains and job growth” when it comes to influencing consumer attitudes, said Michael Hanson, an economist at Bank of America Merrill Lynch.

The price of gasoline has climbed 17 percent since the year began – to a national average of $3.83 a gallon. That’s the highest ever for this time of year. A month ago, it was $3.52.

Gasoline prices have followed oil prices up. Oil is rising, in part, because of tensions surrounding Iran’s nuclear program. Iranian leaders have threatened to close a shipping route into the Persian Gulf. Experts say the standoff could lead to tighter global oil supplies later this year.

Contributing to higher gas prices is stronger demand from China and other developing economies.

Economists note that gas prices tend to hit consumer confidence especially hard once they surpass round numbers, such as $4 a gallon or $5 a gallon.

A Gallup poll last week found that nearly half of Americans would make “significant” spending cuts in other areas if gas topped $5 a gallon. On average, Americans said gas prices of $5.30 to $5.35 are a “tipping point” that would cause them to make those cutbacks.

The price of gasoline will likely follow developments in Iran. Continued sparring between Iran and the West means prices will keep going up. But if Iran adopts a more conciliatory tone, oil and gasoline prices could tumble.

The outcome will help determine the U.S. elections in November. Obama has been under pressure to do something to ease prices even as the economy is producing its best job growth since the recession ended.

A Washington Post-ABC News poll conducted last week found that 59 percent of voters disapproved of the way Obama has handled the economy. A month ago, the same poll found that 53 percent disapproved.



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